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Engine for Growth - VAS adds value to operator bottomlines

October 15, 2006
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With the increasingly cut-throat competition in the telecom sector and changing customer preferences, service providers are competing tooth and nail to provide individual and business customers with innovative valueadded services (VAS).

These include a range of offerings –­ from ringtone downloads to hosted messaging, accounting, and assorted business services. Service providers are also increasingly leveraging technologies like WAP and messaging to build new services that ride on the basic network.

Market size
"VAS currently accounts for 20 per cent of the telecom operators' revenue globally," says Prashant Singhal, partner, assurance practice, Ernst & Young. This figure is estimated to go up to 33 per cent of the total service revenues by 2009. According to Telenity, a leader in VAS platforms and solutions, the total global VAS revenues are projected to reach $160 billion by 2009.

In Asia, most of the growth in telecom services is likely to be from data services. Currently, data accounts for approximately 25 per cent of the total service revenue (at around $45 billion). This is expected to increase to about 35 per cent in another three to four years.

Messaging and entertainment are the key drivers of data revenue growth in the Asian region, together accounting for 80 per cent of the total VAS revenue, according to Telenity.

In India, the VAS market is gaining a firm foothold and has caught the attention of service providers in a big way. Despite the exponential subscriber and revenue growth, ARPUs continue to be low. VAS could be the way out.

In 2002, the VAS market was less than Rs 250 million and contributed less than 0.5 per cent of the operators' revenue. Today, it accounts for up to 10 per cent of operators' revenues. VAS revenues in 2005-06 were about Rs 15 billion. This excludes person-to-person (p2p) SMSs. According to industry experts, the impact of value-added services on earnings is three times higher than that on revenue.

"The VAS market is estimated to grow at an annual rate of 15-20 per cent and is estimated to contribute about 17-18 per cent of the Indian cellular revenues by 2010, up from the current 7-10 per cent," says Singhal.

Key VAS growth areas
Telecom companies are using a plethora of VAS to boost revenues. From itemised billing and caller line identification initially to SMS person-to-everyone, MMS, ringtones, ringback tones (RBTs), wallpapers and m-commerce currently, the VAS market is continuously evolving.

SMS tends to dwarf all other valueadded services, accounting for about 60 per cent of the country's total VAS revenue, according to Probir Roy, co-founder and board director of Coruscant Tec, a mobile solutions company. SMS is perceived to be the cheapest, quickest and easiest form of peer-to-peer mobile communication ever known.

In 2004, 217.76 billion SMSs were sent in China. In comparison, India registered 12.3 billion SMSs and this figure is projected to grow to 180 billion in 2010 (Portion Research Report).

Along with SMS, the market for MMS is growing exponentially. Mobile camera phones are a popular product in India and are helping mobile operators achieve higher ARPUs and profit by creating more data traffic through MMS services.

Various studies have shown that ringback tones are the key to early VAS adoption. According to Amit Dey, head, sales & marketing, OnMobile Asia Pacific, "RBTs have achieved 20-25 per cent penetration with about 10 million active users today and this service continues to grow. They have also increased ARPUs by 8-9 per cent. The major difference here is that the service penetration is driven by voice provisioning: speech-enabled voice portal for content exploration.

Music download is another popular value-added service. The Rs 50 million mobile music industry is hoping to overtake the Rs 7 billion conventional music industry by the end of this fiscal year, according to the Cellular Operators Association of India. Next comes ringtone downloads, followed by games. "As per a recent study conducted by Frost & Sullivan, games contribute 13-14 per cent of VAS," says Sourabh Kaushal, industry manager, ICT practice, Frost & Sullivan.

VAS revenue
MTNL is aiming to more than double its VAS revenue from the 6 per cent of total revenue in 2005-06 to 15 per cent in 200607, according to A.K. Arora, executive director. MTNL's value-added services include SMS, interactive voice response (IVR) system, general packet radio services and caller RBTs.

Hutch and Bharti Airtel have put VAS under umbrella brands such as Airtel Live and Hutch Live. For Airtel, VAS now contributes more than 11 per cent of revenues and it could go up substantially by 2010.

Hutch's VAS business currently accounts for 12 per cent of revenue and is growing handsomely. Its most popular offering is music download, for which it charges Rs 20 for a full song and Rs 5-10 for a partial download.

BPL Mobile, one of Mumbai's largest telecom operators, has also geared up for the VAS challenge. According to company officials, VAS accounted for nearly 15 per cent of its net revenue in 2005.

Spice Telecom's VAS business accounts for about 20 per cent of the total revenue, the highest so far. The company's "My tunes" service is its largest revenue generator, according to company officials. Spice also plans to launch GPRS and a host of IVR services.

Future growth areas
With the industry growing at a tremendous pace, more innovations are expected in the VAS market. However, SMS and ringtones will continue to be popular.

As the mobile market penetrates deeper into non-urban belts where English has very limited penetration, the local language VAS market will experience dramatic growth. And language-independent access will be a key differentiator.

Mobile gaming will also see meteoric growth over the next one year. Although gaming is restricted to a certain age group (between 14 and 24 years), it could take off with the launch of 3G. According to a Nasscom report, the mobile gamedevelopment industry is worth $100 million in India, and is growing at 100 per cent year-on-year. By 2010, this industry is expected to be worth $500 million. Currently, these games are priced between Rs 50 and Rs 150 depending on the brand and popularity of the game.

The content market has also become competitive since operators such as Reliance have begun charging for it. This implies that now content providers are willing to develop quality content and deploy it across operators to make money.

According to a report by Atos Origin, a leading international IT services company, and IDC, enterprise VAS such as network management, security and outsourced messaging will be another key growth area.

Further, according to industry experts, mobile TV is likely to be the next step in mobile applications. The acceptance of mobile TV is high and mobility and flexibility are the strongest perceived benefits of the mobile. Currently, many operators are conducting a trial run on this application and it will be launched shortly.

Finally, m-commerce and locationbased services (LBSs) are likely to be the next revenue generators. LBS will enable subscribers to identify locations on their mobiles through SMS, MMS and GPRS. This service would be as cheap as SMS. BSNL will be launching its LBS in two regions by the end of the year. Senior company officials claim that LBS will be a major revenue earner for the company in the next couple of years.

Despite the increased focus on VAS, these services are yet to contribute significantly to the operators' balance sheet. Several issues need to be resolved.

There is a lack of content. Developers are ready to build new content but are held back by the absence of viable business models. This is because developers face major problems with revenue realisations today, in part due to a lack of standardised and robust billing systems.

In fact, this is one of the primary challenges that the entire supply chain faces. While developers have been providing operators a wide array of mobile content, they face the problem of extended credit periods. This places a major strain on their resources to keep innovating and developing newer content.

Revenue sharing with content providers is a concern as both content creators and operators want larger shares.

The limited number of data-enabled handsets is another major handicap for GSM operators. Moreover, most of the handsets that can leverage VAS are expensive and hence cater only to the higher-end users.

Finally, subscribers are also deterred from using such services because of the steep price tag they come with. If usage has to grow, the pricing has to be sorted out first.

There needs to be clarity on how much the user is paying for the services provided by the telecom operator and the content provider. At present, users just pay a lump sum without knowing the break-up.

Despite these constraints, there is a growing demand for VAS, thereby resulting in new services, better applications, richer content and continuous connection capabilities. No doubt, value-added services will be an important engine of growth for India's wireless market.

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