The highlight of the TiEcon 2008 summit was a great overview the Mobile VAS ecosystem from Ritesh Banglani from IDG Ventures, who gave the investors perspective on the Mobile VAS space, and highlighted several key opportunities and challenges.
Banglani said that most Mobile VAS conferences he’s attended are of two types – where the discussion is either characterised by hype, or despair. There is hype if the disucssion is about the number of users and the “opportunity” in those numbers, and despair if it is about operators, low revenue shares, and so on.
Generally fall under 3 or 4 categories:
— Distribution Channels: The biggest issue is the distribution channels. Currently there are two active distribution channels – either through operators or media companies. Both of these are far larger organizations than mobile VAS companies, and squeeze them for margins. That is the second challenge.
— Margins: Getting margins even for highly innovative products is very hard. On average, gross margins for mobile VAS players are below 35 percent.
— Technical: low bandwidth, small screens on mobile phones, and so on. That is typically a challenge when you try to port applications which work successfully in the west.
— Funding: The fourth challenge challenge is the funding challenge for small companies in this space, since it’s very difficult to get their first customer, and investors are not keen on working with companies that do not have customers.
Importantly, he added that “When we go out, looking for entrepreneurs, we look for people who don’t necessarily want these things to change, but look for people who can survive despite these challenges.”
There are discontinuities in the marketplace – things like 3G and new operators – and there are some things which have changed slowly, but have reached a critical mass:
A short term tactical opportunity for startups: As soon as 3G is operationalized by operators, they will start looking for VAS applications. While these will not be at a scale to make substantial money, they’re a very good entry point to operators. You get access to a key distribution channel.
More opportunities, the areas that IDG wants to invest in, and the challenges that Mobile VAS companies will face in the coming months:
Mobile WAP Usage: Probably the most surprising number to have come out in the past six months or so, has been the number of Mobile Internet users, which is close to 80 million. While not all of these are active Mobile Internet users, but even if we take 1/5th, that’s 15-16 million users, comparable to the 30-40 million that are on the Internet. According to some research, a bulk of WAP usage is in the lower middle class segment – plumbers, mechanics etc, who are using the mobile to download content. Companies who want to sell content or create communities, can now target users who don’t have an overlap with the Internet user base.
Increased Content Consumption: “Another trend that has slowly crept up on us is the increased content consumption. One of the top requested features is mobile music, either an FM radio or an MP3 player. I used to manage a mobile games business, and back in 2004, I remember going to Airtel, and asking about how many mobile games are being downloaded. The number we got was 65000 on the entire national network. Now a large mobile games company told me that they’re already selling more than 2 million games per month. The difference is startling.”
Mobile Advertising: “I’ve been talking to a few mobile advertising companies – what surprised me was the effectiveness of the medium. The average, across advertisers and publishers, has a clickthrough rate of upwards of 4-5%. This compared to less than 1% for an average Internet ad. Even if these numbers come down slightly as the base grows, I’m extremely optimistic. When you combine Internet advertising with mobile advertising, when you combine Internet advertising with mobile advertising, the response rate was a shocking 10%. So the advertisers are only experimenting right now, but the fact that they’re willing to look at mobile as a mass medium, is a very encouragaging trend.”
Direct to consumer: “Another trend I’d like to point out is the emergence of direct to consumer model. Companies like SMS Gupshup and Netcore are not dependent on the operator, and have built this ontheir own. Whether they’ve made money on their own or not is a separate question, but users have accepted them outside of the operator and media company ecosystem.”
New Operators: New operators help by increasing competition among mobile VAS companies, which in the medium term, would lead to an increase in the revenue share in the entire market.
Rural Users: in the growth of the rural interface – about 30 percent of new users are from rural areas, and not many VAS companies are targeting that market.
What IDG Wants To Invest In
Voice: The single biggest area of opportunity right now, is Voice applications. OnMobile has done lots in terms of evangelizing it, but by no means is this opportunity fully exhausted. This is also driven by the fact that most handsets sold in India are low cost handsets.
Mobile Commerce: Another opportunity we are bullish on is mobile commerce. E-Commerce successful on the Internet will find a route on the mobile, and we’re bullish on travel companies using the mobile channel for ticketing. Bullish on soft goods retailing on the mobile, jobs, matrimony, all models based on someone paying. We are also interested in alternate distribution models for other peoples applications – distributing online, bluetooth, kiosk. Anything that decreases the leverage of 2-3 large players in the ecosystem would be beneficial for the Industry.
Local Language Capabilities: The infrastructure enablers. As the mobile phone penetration goes to the next layer in society, English will be an issue. Anyone able to develop good local level technology will be interesting for us.
Team: the biggest will be putting together the right team in the market. People have become a lot more risk averse. We are already finding that in ecosystems that are small, people are clinging to jobs in large companies.
First Customer: Getting your first customer will be much tougher now. I would encourage startup entrepreneurs that if you have a product, get a customer even if the revenues are not significant.
Increasing collection cycle: The other emerging issue is the collection cycle – already Indian operators are notorious for taking 6 months to pay or more – that will get worse.