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Set to Grow - Increasing takers for MVAS

July 15, 2010

With operators exploring alternative revenue streams to maximise revenues and with the expected launch of 3G services by end-2010, the mobile value-added services (MVAS) industry, which has been a niche industry so far, is now emerging as a lucrative business and is likely to grow at a rapid clip over the next few years.

At present, VAS accounts for a small proportion of operator revenues with voice constituting 90 per cent. However, faced with stretched balance sheets (due to unsustainably low tariffs, 3G licence fee payouts and network rollouts), mobile operators are widening their focus on increasing data revenues to prop up depleting ARPUs and boost margins. "The VAS industry is constantly on the radar of telecom operators, and now with 3G services on the horizon, its share is expected to increase manifold," says Sangeet Chowfla, chief strategy officer, Comviva.

Moreover, given the hyper competition in the operator space (12-14 operators vis-à-vis the global average of three-four) and the impending launch of mobile number portability (MNP), differentiation in terms of MVAS will become a key customer retention strategy for operators.

Mobile VAS providers can be split into two broad categories: content providers (music, gaming, videos) and technology enablers. While the telecom operator gets to keep 60-70 per cent of the revenue generated, the rest is split among the enablers and content developers. In fact, the skewed revenue distribution has been a long-standing issue with the VAS industry.

Size and growth
While estimates of the size of the Indian VAS industry vary, according to the Internet and Mobile Association of India, the market size of the VAS industry is expected to reach Rs 219.4 billion by December 2010, up from Rs 166.5 billion in December 2009.

Another estimate by research firm Informa Telecoms & Media values the Indian VAS market at Rs 176 billion ($4 billion) at present. With the expected roll Currently, VAS accounts for 9-10 per cent of an operator's revenues, and this share is expected to increase to 14 per cent in the next two years, and 25-30 per cent over the next five to seven years with 3G services driving the growth in the VAS space.3G technology's potential to increase revenues from VAS is evident from the fact that mobile internet traffic on China Mobile's network tripled after it launched 3G services last year.

Meanwhile, estimates from Frost & Sullivan have pegged the compound annual growth rate (CAGR) of the MVAS market at 16.6 per cent during 2008 to 2015.

Key trends
MVAS primarily comprises entertainment services (music, wallpapers, games, etc.), information services (new alerts, stock prices, etc.) and m-commerce.

The most successful VAS offered by operators worldwide is based on subscription services, which include all those services that provide a continuous update of information, content and data to the end-user.The success of these services is based on a long-term engagement of the customer, continuous education on VAS service usage as well as discounted availability of multiple-purchase content compared to standard single purchase.

Within the VAS segment, SMS services account for the lion's share of the market at about 49 per cent, while musicbased content such as ringtones and interactive voice recognition (IVR) account for another 40 per cent. Due to a lack of high speed networks, games, music, videos and downloads together account for only about a quarter of the market. "The growth of mobile VAS over the past few years has been impressive. Mass market mobile entertainment VAS in India includes Bollywood ringtones, caller ringback tones, games and community services. While these services are the key data ARPU generators for operators and continue to show strong growth, new offerings such as mobile commerce and online gaming have also gained considerable traction," says Chowfla. There has been a noticeable shift in SMS usage by mobile consumers. While in 2005, SMS accounted for 80 per cent of the VAS market, its share has since gone down considerably as mobile subscribers now opt for other VAS products such as mobile music. Currently, the VAS market in the country is primarily being driven by mobile music and SMS.Data is another promising area of growth.Email, data and GPRS usage has grown over the years. From an insignificant 1.5 per cent in 2005, GPRS accounted for 8 per cent of the VAS market in 2009. This trend shows a shift towards more data-oriented applications.

While entertainment services have been the foundation of the Indian VAS industry and will continue to grow, the focus will shift to utility-based applications that address day-to-day consumer needs, enterprise mobility applications and m-commerce.

M-commerce, already a success in other emerging countries of Africa, is expected to gain considerable momentum at home as the Telecom Regulatory Authority of India and the Reserve Bank of India have recently finalised guidelines for m-banking. According to Comviva, a leading provider of integrated VAS solutions, there are huge opportunities in deploying mobile banking and payment services in India as the country has a large population living in small towns and rural areas, only a small portion of which has bank accounts or access to banks.

As the penetration of MVAS grows in rural India, the necessity of IVR systems will increase as rural consumers are more likely to opt for an IVR platform in the local language. According to industry experts, the present usage of VAS in rural areas is almost negligible at less than 5 per cent. Core messaging services and the use of regional languages will play a key role in driving the uptake of VAS in these regions.

MVAS is also getting too complicated to handle in-house. Wth increased rural penetration, a high degree of content customisation is required, and complex applications like mobile TV/video, fullmotion videos, wireless teleconferencing, multi-player online games, and m-commerce are gaining popularity. Hence, operators are opting for outsourcing their VAS solutions to managed VAS players so that they can concentrate on their core business instead. The managed VAS vendor provides for high customisation as well as product development.

In 2009, Bharti Airtel, the trendsetter for managed services (the company started a trend in managed network services in 2004), awarded a three-year managed services deal to Comviva, a leading provider of integrated VAS solutions, for its valueadded services portfolio. As part of the deal, Comviva manages more than 2,000 of Airtel's VAS nodes from various partners across India to meet defined service level agreements. In addition, the company manages the complexities associated with the emergence of multiple technologies, different standards, applications and a plethora of content to help grow Airtel's VAS business.

Over the past few years, this segment has attracted strong private equity and venture capitalist interest, and has witnessed inflows of over $100 million since 2006. The sector continued to attract investment even during the global economic slowdown. According to industry experts, as operators roll out 3G services, this trend is likely to continue. Private equity firms are now on the lookout for downstream or ancillary opportunities including in the MVAS segment.

The rollout of 3G services will enable high-end bandwidth-intensive VAS offerings that build on video and data capabilities. Bharat Sanchar Nigam Limited's current 3G offering facilitates the viewing of television content (such as reality shows) on the mobile phone. With adequate data bandwidth available, content creators are also likely to invest in made-for-mobile content. A current example of made-formobile content is Airtel Talkies, which provides audio clips of films for subscribers.

However, while 3G will lead to a significant increase in data usage, the extent to which this technology will push demand remains to be seen and would depend on how the operators utilise 3G spectrum.

Competitive landscape
Like the operator space, the MVAS industry in the country too is over-crowded with players. However, only a few dominate the market. Some of the major VAS players in India are Mauj Telecom, On-Mobile, Mobile2win, Spice Digital, IMI Mobile, Comviva and One97 Communications.
With revenues of Rs 250 million-Rs 2.5 billion and an EBITDA of 15-35 per cent, these companies are witnessing 100 per cent year-on-year growth and are rapidly scaling up operations.

VAS players are hopeful of a growth curve similar to that of mobile services, with 3G services expected to provide an impetus to sector growth. Companies like Comviva are expecting 50 per cent growth over their current revenues.

In the near future, VAS players will have to examine their core strengths and consolidation at the industry level is likely.This, in turn, would enable them to offer a wide array of VAS products, increasing their bargaining power with operators.Indian VAS players have also started acquiring companies overseas. For example, IMI Mobile is in the process of acquiring UK-based mobile applications company WIN Plc at a valuation of $24 million. The WIN deal will be IMI Mobile's fourth acquisition. In July 2009, it acquired Mobytec, a social aggregation and phonebook management service provider in the UK. Earlier in February 2009, it acquired Music2You, a music download and subscription services platform, from Nokia Siemens Networks, and in November 2008, it acquired Dx3, a digital content delivery services provider in the UK.

In the domestic market, however, while there have been a few large-scale deals, consolidation is yet to take place.

Going forward, the VAS success story is set to grow, with companies in this segment continuously developing innovative products and services. Moreover, 3G and broadband wireless access will offer operators the opportunity to adopt differential pricing strategies for VAS and cater to both mass and niche market demands.


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