‘Indian Mobile VAS industry revenues estimated at $2bn by 2008’- Well, this is the sort of headline that overestimates the size of this nascent industry. One common practice (mistake) that most market researchers commit while trying to estimate/project the size of Mobile VAS is to include the P2P (person-to-person) SMS revenues as well. However, when one is purely looking at revenue recurring to VAS players, the number is surprisingly small.
The skewed revenue distribution is one reason to boot. The revenue from P2P SMS is entirely pocketed by the Telco’s; hence pure VAS players (except for the platform providers) do not make any money out of it. Out of the rest of services under VAS, the Telco’s continue to pocket another 60-80% of the revenues from the end user. Here’s what a recent research report by IMRB suggests in terms of revenue share.
| MVAS Revenue | |
| Telco’s | 2,185-2,910 crores |
| Technology enabler | 364-730 crores |
| Content Aggregator | 364-545 crores |
| Content Owner | 180-364 crores |
| Total (Including Telco’s share) | ~3,100-4,500 crores |
| Total (Excluding Telco share) | ~900-1650 crores |
| ARPU | |||
| Call charges & Rentals | 90% | Rs 225 | Rentals, Call Charges, etc. |
| P2P SMS | 5% | Rs 12.50 | This does not through to the VAS Providers |
| VAS | 5% | Rs 12.50 | ~ $1 billion annualised revenue |
| Revenue for VASPs | 15-20% of the above | Rs 2 | $250-350 million annualised revenue |
As the tables show, the revenue accruing to the VAS players is about $200-350 Mn (Never mind that OnMobile’s turnover is ~$200 Mn). Net-net, VAS players make just Rs 2 out of Rs 250 ARPU. This turnover however, does not include the revenues of platform & software providers, which we estimate at ~$100 Mn, taking the total revenues accruing to VAS related players to about ~$300-400 Mn. But, look at the number of investments in the space, the total size is close to ~$200-300 Mn in the past few years.
A $300 Mn investment into an industry with a size of $450 Mn- seems a bit stretched? But the investment thesis is based on the growth rate estimations which are upwards of 50-70% YOY for many years to come. With ARPU’s at $6-8 a month and declining further, along with a ‘cooled off’ subscriber growth- the 70% growth mark seems like an uphill task.
The VC’s who joined the bandwagon and generally the investment community seems to have woken up to this idea. Any new VAS business plan, according to them must ‘by-pass the mobile operator’- well, that’s easier said than done. This one time ‘hot’ investment sector can now be found in the ‘deep freezer’ cabinets (There are odd investments like Telibhramha which have ‘by-passed’ the telco’s, though). So, where do we see the industry headed- when you start hearing ‘nobody’s making money in our sector’, start counting the days before you hear about an acquisition. ‘Consolidation’ is knocking at the door -and we expect that it’s about time the VAS players opened their doors.
Consolidation has already started- OnMobile acquired Voxmobili SA, a French company that provides software services to telecom companies, for $35.12 million. It acquired another company Telisma a speech recognition software product company with capabilities in 10 Indian languages and ITFinity Solutions, a company funded by stellar private investors. The management has been reiterating its intentions to buy ‘products’ to strengthen its portfolio of offerings and to acquire new technologies (e.g.: ITFinity had a strong Java client, which OnMobile wanted).
We believe that the trend will continue in the next few years and to quote OnMobile’s management - “We believe that there will be consolidation - the large will become larger, and a large number of smaller players will consolidate.” The key deal drivers will include technology, products and once steam has gathered again, the ones present in other emerging markets as well. We however believe that content will not be an important driver alone for deals in this space.
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