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(Source: Andrew Bolin)
[Published in Medianama]
I attended the Founders Forum event in Mumbai, organized by Rajesh Sawhney, Brent Hoberman and Jonathan Goodwin, as well as the Nokia Growth Partners Mobile Internet event.
Jonathan Bill of Vodafone spoke at both these events about upcoming changes in Vodafone’s offdeck rev-share regime in India. This change, along with a potential broadband data plan price war and growth in smartphone users could result in a real transition in mobile data usage over the remainder of this year, charting a way out of the slump that I discussed in my last post.
Vodafone will start to offer more favorable rev-share deals to those direct-to-consumer mobile apps/services companies that will not rely on Vodafone for promotion and customer acquistion. In other words, developers will keep 70% of the revenue from their applications (at a scale of Rs 1 cr+ in billings; 60% below that), as opposed to the 25-30% currently prevalent here. 70% is more in line with what Apple and Google offer to developers for iOS and Android apps respectively as well as what operators are offering in the US, Europe, China and Japan.
The bet here is that the smaller operators like Aircel and Tata DoCoMo follow relatively quickly and then the larger ones like Airtel and Reliance may be compelled to follow suit – in aggregate, these greater offdeck rev-shares will drive more innovation and more revenue for developers. Nokia, among others, is citing a 3-5x jump in conversation rates when operator billing is enabled for paid apps and in-app purchases.
I don’t think mobile operators are risking much in the short- to medium-term by tring this since this change in rev-share would only apply to offdeck billing and not to the majority of revenue that these operators get through whitelabeled services, data plans and p2p SMS that they already offer. In the long-term, though, whitelabel services will suffer from competition from D2C apps/services – also, ARPU from data plans will come down in price wars although overall data plan revenue should go up with significantly higher numbers of data subscriptions.
I don’t expect these changes to break open the eco-system overnight. 70% rev-share to developers was offered in the US for several years prior to the iPhone being introduced in 2007, yet the eco-system there did not break-out. Why? Because there is lots of other friction in the eco-system as well, including multi-step transaction flows for consumers, 4-6 month payout periods for developers, reconciliation issues, no standard app discovery methodology (although app stores are starting to be offered by most operators today), no offdeck billing aggregator in India, fragmented platforms, lack of customer trust, and limited success/availability of multiple business models like paid apps, in-app billing, in-app advertising etc.
However, assuming this change from Vodafone comes through in the next couple of months, here’s some of what could ensue:
- In anticipation of other operators following through with the same model, I expect to see the formation of many new teams with strong consumer acquisition, engagement and retention DNA. Hopefully, with funds freed up for product and marketing, there should be a greater focus on building brand and acquiring customers directly on what will be the leading platforms in India in the next few years: mobile Web and Android (in my opinion, not SMS, USSD, J2ME or iOS). I am bullish about the prospects of some of these D2C categories, especially related to entertainment.
- Mobile ad networks (e.g. Google, InMobi, Appia, Getjar) will benefit from some increased performance-based ad spend from developers. As we have seen in other countries, mobile content providers (music, ringtones, apps) with direct revenue models have been the earliest adopters of mobile advertising because they have been able to tie marketing spend directly to revenue.
- Existing whitelabel MVAS vendors will launch consumer brands or start pushing their nascent consumer brands more aggressively. In other geographies where the D2C eco-system opened up, whitelabel vendors have struggled tremendously with building consumer brands and have mostly failed. Impediments include trying to maintain relationships with their mobile operator customers while competing with them in their D2C business and not having the consumer DNA in the team for user acquisition and retention.
- Other mobile operators might slowly start offering similar rev-shares although I think they will wait to see the results of Vodafone’s new initiative before risking their arguably miniscule offdeck billing revenue streams.
- We may see a carrier payments aggregator emerge once enough operators have changed their offdeck rev-share percentages. InMobi (with Smartpay) and Opera are already moving this way in India as announced at MWC. Boku, Zong, Paypal may come this way over time. There should be a space for a standalone Indian carrier payments aggregator, along the lines of what Qpass did in the US a decade ago.
So, I see a much more vibrant and larger MVAS eco-system emerging over the next few years. Now is a right time to start direct-to-consumer companies in mobile – we are seeing a ton of founders with exciting new ideas. Bring it on!
I find myself simultaneously excited by the future prospects of India’s mobile value-added services (MVAS) industry and depressed by the current friction in the eco-system. Overall though, I am cautiously optimistic – there is some hope on the horizon in the form of upcoming offdeck rev-share changes, smartphone growth, and the (rumored) Reliance 4G launch.
So, what is the problem?
Mobile operator ARPU in India has collapsed from roughly $10 in 2005 to $3 currently, compared to a steady $11 in China and $70 in the US. There is over-competition in the market – good news for consumers in terms of voice prices but bad news for consumers in terms of slower rollout of broadband and high wireless data prices.
Wireless data in India is relatively early – it accounts for ~$4.8 billion in revenue (according to IAMAI and Analysys Mason) or 16% of overall wireless revenue of ~$30 billion. MVAS (excluding data plans and p2p SMS) accounts for approximately half of wireless data revenue in India. Contrast this to US data revenue of ~$70 billion in 2011 (approximately 35-40% of overall wireless revenue of $200 billion) and China data revenue of $32 billion (approximately 27% of overall wireless revenue of $120 billion). There are approximately 50 million mobile Internet users in India out of ~800 million mobile users.
MVAS companies in India are not growing fast (or at all). Since they have traditionally focused on building businesses inside the operator walled garden, they have been governed by the 25-30% cap on the rev-share that they get. Recent TRAI regulation changes have not helped the vendors (although I think consumers have benefited from the elimination of spam and seamy billing practices). Due to their whitelabel nature and lack of consumer branding, most MVAS companies are being increasingly commoditized. They also have a high cost base given the rev-share constraint, content licensing costs and the fixed cost of managing operator relationships.
The leading MVAS companies like OnMobile, IMIMobile, Comviva and One97 have now refocused their attention outside India. Beyond that, there is a long-tail of MVAS companies, none of which seem to have truly punched through $5-10M per year in revenue and many of which have now optimized for cash-flow at the expense of growth.
No alternative payments platform in place. Operator billing is the most pervasive payment mechanism in the world, and in India (apart from cash and checks). Some sort of alternative mechanism needs to come along, whether cash load networks or mobile wallets with integration to net banking/ETF/credit cards/cash load networks or operator billing aggregators. 18 million credit cards is a miniscule number relative to 800 million+ mobile users.
But I think there is some hope on the horizon. Here’s what to look out for in the next 12-24 months:
1) offdeck rev-shares could be poised to increase dramatically from 30% to developers going up to 70% in the next 12 months, with Vodafone leading the charge (more on this in the next post).
2) over the next 2-3 years, as true smartphones (Android/iOS) grow to ~100 million installed base, from the current 10-15 million, consumers will have access to a global applications database and regular payment options.
3) Reliance 4G may disrupt on pricing and rev-shares to break open the market. This might drive a data plan price war.
(republished from Nextwala blog)