The Business of Mobile VAS

The mobile phone today, is as ubiquitous as a wristwatch was for most of the 20th century. It is, in fact, on its way to pretty much replacing the wristwatch as the one item you never leave home without. It has already become our center of communication (whether for calling or writing) and is one the way to becoming the center for information and eventually entertainment. This shift in consumption of services on the mobile platform is very significant as the mobile population of the world is in the billions! I explore the effect of this shift on the various participants of the mobile business ecosystem.

Value Addition

Voice and text (SMS or Short Messaging Service) are the bread and butter of a mobile phone. These are known as basic services. Every single phone sold today MUST be able to provide at least this level of functionality. Voice and text, however, are the ultimate in commoditized services (i.e. - no one has a competitive advantage. Talking on one phone vs. the other is essentially the same) and therefore are very low margin products. Most operators, therefore, have to rely on what is known as Value Added Services or VAS to increase revenues and margins. VAS includes data access, email, various information services (sports scores, news alerts etc.), content (ringtones, caller back tones, wallpapers etc.), games (all of you know Snake or Brickbreaker), applications (ticket purchases, banking, money transfer) and so on. All of these services are differentiators for operators. They are used not only to attract customers, but also have much higher margins. The current size of the VAS market in India is estimated to be about $1.8 billion (Rs. 9000 Crore) and expected to grow to $3.5 billion (Rs. 17000 Crore) over the next 12 months. That’s a HUGE 70% growth rate.

The VAS Value Chain

The various contributors to the VAS industry are outlined below.

The content creator is a company that specializes in creating the actual content for the consumer to buy. This would be the one that creates the ringtones or wallpapers (either original content or derived from a film or game etc.) that people buy.

The Aggregator is the one that usually owns the Short Code (the 4 - 6 digit code that the consumer calls or sends an SMS to to get the content) and ‘aggregates’ content from a number of content creators.

The Technology enabler is usually a partner of the aggregator and provides the back end servers, billing, servicing and actual physical delivery of the content.

The Operator is the cellphone service provider that we all use.

The consumer is you.

The Waterfall

As with any value chain, since each player provides some value addition, each one gets a share of the revenues. In the Indian scenario, the lions share of revenue (i.e. - the Rs. 10 or so that we pay for a ringtone or the Rs. 30/month we would pay for the caller back tone facility) goes to the operator. This is about 70% of the revenue. The balance is divided between the technology partner, aggregator and the content creator. So, in essence, of every ringtone or wallpaper or game that a consumer (that’s you) downloads, 7/10 Rs. goes into the operator’s pocket. Of the remaining 30%, the deal is flexible between the technology partner, aggregator and content creator, with the bulk of revenue going to the content.

The complete opposite is true abroad. There the operator gets to keep only about 30%. The rest of the revenue goes to the other three and again the content creator gets the largest share of the pie. This is in line with the rest of the media and entertainment industry, where the content creator or owner gets to keep the lions share of the revenue from the content.

The Future

India will also catch up to this norm. Currently the operators have no incentive to increase the payouts to content owners as their growth rates are being propelled by new users rather than higher margin services (as opposed to places like the US or Europe where the penetration rates are so high that new user growth is literally zero). It is predicted that by about 2010, India will have achieved about 60% penetration (6/10 people will have a cellphone), at which point the operators will have to start relying on higher margin services to fuel growth. This will mean incentivizing the rest of the VAS ecosystem to come up with newer and more saleable and innovative content. This is also good news for consumers as they will have increased choice and higher quality content once everyone has a more significant stake in the game.

I will continue on this theme and move onto the roles and current status of the various players in the ecosystem.

Tagged as: media & entertainment, mobile, vas