Extending its relationship with HCL Infosystems, Nokia has announced plans to set up a joint venture with the Indian company “to sell mobile value added services and entertainment content directly to consumers in India.” This appears to be the offline model for Nokia’s services and content business – Ovi.
HCL has been working with Nokia for over 10 years now, managing their distribution network and “Nokia Care Centers”, their customer care initiative. It appears that we might just see a retail infrastructure established for USB drives loaded with legal music, wallpapers and games.
The Big Direct To Consumer Gamble
Our sense is that this will be the largest direct-to-consumer VAS initiative in India yet. For many years now, VAS companies have flirted with the idea of developing an offline strategy and bypassing the mobile operator, but viability has been a key issue. Mobile content kiosks are nice to talk about at conferences and present as case studies to the press (including us), but managing a huge distribution network on low content margins, and managing the billing from multiple points-of-purchase, has been a major challenge.
Such a business does not work without massive scale – the kind that mobile operators have achieved with their pre-paid recharge business.
A few things to keep in mind when considering the retail play, based on inputs from a research MediaNama had done last year:
1. Low VAS ARPU and Limited Base: A majority of the mobile user base in India is pre-paid, and a large amount of the growth is being driven by the lifetime pre-paid segment. The urban or semi-urban lower income consumers that form a majority of this segment spend, on an average, Rs. 100-130 a month, often less. The amount spent on content by the lower income VAS segment is almost negligible – at best, it’s restricted to Caller Ringback Tones (CRBT). The VAS ARPU for mobile operators is fairly limited – ranging from around Rs. 18 to Rs. 31 for the overall user base. This has been flat, or declining. The challenge for Nokia is to make consumers spend over and above their already limited VAS expenditure.
Most pre-paid consumers limit their phone usage to within a monthly limit. The lifetime pre-paid consumer limits himself even more, recharging around 10-12 times a month, often buying 5-10 recharge cards of value Rs. 10 at a time, in order to keep a tab on the mobile phone expenses. The Pre-paid segment is very price conscious, and very careful about every rupee spent. The Lifetime pre-paid consumer recharges only when he has to make calls. Nokia will be challenged to actually make a large number of consumers spend over and above the amount they spend on voice.
2. Retail Issues: Why Nokia Should Adopt A Pre-paid Model
— Network and Pre-Paid vs Physical Distribution: If Nokia intends to achieve scale with this business, they’ll need to have a significant retail spread – which will be HCLs mandate. A physical distribution strategy – using bluetooth, USB drives or memory cards would end up being more expensive (because of hardware requirements), and more difficult to manage in terms of having a customizable or updated content mix. A pre-paid network, and perhaps using a Voice Portal similar to that of mobile operators would be far more scalable, customizable and cost-efficient, though not as user-friendly. Remember that Nokia owns the short code 55555. In this context, the Other Service Provider policy that the TRAI is working on becomes even more significant.
— Point-of-purchase issues: Retailers often have inadequate point-of-purchase display space in their shops, and promoting these services will be a key issue for Nokia. At best, in case of physical distribution, the content can be sold as an add-on with the handset; as a standalone content and services business, it appears it will be limited.
— Retailer Margins: Assuming that pre-paid is the way to go, retailers that we had spoken to informed us that a majority of the recharges for the lifetime pre-paid segment are for the Rs. 10 recharge card. Interestingly, the retailer makes a margin of only Rs. 0.05. They continue to stock the recharge cards because the low-end consumer also buys other items like cigarettes, matches, soap sachets etc.
— Content Issues: How will Nokia offer flexibility to consumers: a large purchase of, say, 200 songs on a USB would cost around Rs. 400 assuming a price as low as Rs. 2 per song, is expensive. Purchase of content in a sachet format will allow the consumers the freedom to buy content, but in an offline mode, the time a consumer spends putting together a playlist would be a retailers nightmare. At the same time, a network dependent approach would bring in operator partners that might eat into margins, and then there is the issue of usability.
Broadly, our take on the direct to consumer business: it needs scale, pricing flexibility, significant retail support, and is better as a service on the network than off it, with the prepaid model offering more opportunities, but with unique challenges.
Do share your perspective on the model, and please feel free to challenge some of things we’ve said.