Viedea Interactive

Training Outsourcing: India market perspective

2010-05-10T16:03:00.004+05:30

We at Viedea capital have been working with companies the training & e-learning industry over the past few years and continue to witness that companies in this space are growing a rapid pace. This is also marked by the fact that E-learning players in India have one of the highest representations in the Deloitte Technology Fast 500 list, after the software sector.

Training, not completely in-house, anymore:

Corporations world over, look at E-learning or tech based training as one of the ways to achieve organizational growth and improved business performance. E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and at the same time reducing the total cost of training. E-learning is used to train employees, customers and service technicians on product knowledge, concepts, strategies, risk and finance, compliance and technology.

Engaging third party training/elearning companies is more common place in the US than in India. Training companies, in general, specialize in either particular sector or particular verticals like sales, leadership etc. Again, leading IT consulting & ITES companies such as Accenture, IBM, ACS, etc rule the roost in training. However, standalone training providers like Element K (NIIT), Expertus, Adayana, Intrepid Learning, Learn.com, Geolearning, Total Training Network etc offer more specialized & custom training/e-learning solutions.

Market Size:

· There is an inherent shift in the learning methods adopted by companies in employee training from on-the-job & classroom based training to e-learning. IDC estimates e-learning adoption at 48%, here.

· IDC research estimated the size of e-learning market at ~$16 bn in 2007, growing 20.4% a year to reach $40 bn by 2012.

Outsourcing to India: Like most solutions, training is also broken down into processes and in-turn into the ‘non-core’ processes which can be outsourced. What is outsourced? Training providers focus on their core competencies like deployment, delivery and R&D in their domain. While, other processes such as (1) content creation/design/conversion/repurposing; (2) technology tools to create, convert, deliver, host & support content and (3) Consulting & implementation support are outsourced to either third party elearning companies or captive centers in countries like India.

Market Size: Viedea estimates that revenues from e-learning offshoring industry in India stands at $500-600 mn (including captives). The major companies which operate in India are Tata Interactive Systems, NIIT, Centum (Bharti entity), Apatara, Hurix, Excelsoft, eMantras, Liqvid, Harbinger (tech products), FCS Software (listed entity), Adayana, Brainvisa, Edutech, Expertus, WhiteHouse IT, LearningMate, Zeus, Praxis, EI Learning, Upside learning, Libra Interactive, Magic software etc

Value Notes, an Information & Research firm has estimated that the sector is set to grow at 20-30% a year.

Sample this:

1. Arguably, India’s best Venture Capital exit came from a company in the e-learning industry. UTI exited from Excelsoft Technologies with 50X returns by selling ~35% stake (costing it $600K) to D E Shaw in 2008 at a whopping $31 mn, valuing the company at close to $75 mn. Sudhanva who is considered a stalwart in the industry has driven the company through a storm during the early 2000’s and is now on the path to hit the market with an IPO. The learning solution company has generated a net profit margins of 50% on a top line of $11 mn in FY08, which essentially meant that the company was valued at 7x times its topline! DE Shaw has paid such a high valuation because of the enormous profit levels on the company’s product and the blistering pace of growth (last heard, they had doubled revenues to nearly $20-22 mn in 2010).

2. Upside Learning, founded by Amit Garg & Amit Gautam, is one of the fastest learning solutions companies in India with a growth rate of 413% y-o-y over the past 3 years. The Company provides custom content, LMS & assessment products, e-learning solutions and a myriad of catalog courses to training companies, SMBs & enterprises. The Pune based company has also been recognized as an emerging leader in Training Industry Inc’s 2009 list and was featured in Deloitte’s Fast 50 & 500 list.

3. Harbinger Knowledge Products, part of the Pune based Harbinger Group, is widely known for its innovative interactivity products & learning solutions like Elicitus, Raptivity (aimed at e-learning & web professionals), TeemingPod (focused on informal learning) and YawnBuster (classroom training). Harbinger’s Chairman & MD Vikas Joshi along with Jayant Kulkarni & Seema Chaudhary have grown the company by over 200% y-o-y over the past three years, according to Deloitte.

The market for “nice” investment bankers..

2009-12-22T11:59:00.000+05:30

At a social gathering last week I was asked the usual “so, what do you do?” question by somebody I had just been introduced to. When I replied that I was an investment banker, I got an incredulous look followed by “But you look too cherubic to be an investment banker. You should have a sharp angular face and look mean. I suggest you change your profession, you just don’t look the part”. While this sounds like an amusing anecdote, I was left wondering whether this was a reflection on the profession or on me.

I recently read an article in ToI about an amusement arcade game called ‘Whack the Banker’ which was proving to be a big hit in the UK. The media of course, with predictable regularity profiles the greed and avarice of alpha male bulge bracket investment bankers who snatch food from the mouths of starving, homeless people to pad their own pockets. These are of course facetious extremes; reality probability lies somewhere in between.

In our own interactions with investment bankers, especially those in the mid market segment, we’ve generally seen a fairly well ingrained sense of ethics and fair play. Of course, we’ve had the odd case where a banker deliberately misrepresented facts about their client or tried to go behind our backs and poach our client. This said, the one aspect of i-banker behaviour we’d definitely like to change is the unnecessary posturing and game-playing that is almost de rigueur for every banker driven deal. I strongly believe that there is absolutely no gain in value that is derived from such posturing and it adds 20-30% to the time a deal takes to close. An honest dialogue between the bankers representing both sides of a deal will probably achieve better results for both parties and save a lot of time for all concerned.

At Viedea, we’ve always believed in the value of being honest, straight-forward responsive bankers who work with like minded clients. In fact, that is our USP in many ways, along with the emphasis on quality – quality clients, quality deals, quality employees and quality work. There is a market for “nice” investment bankers after all!

Education : The new holy grail for VC/PE's

2009-03-10T12:41:00.016+05:30

Ask any VC in India these days what their top investment sectors are and more often than not you will hear ‘education’ and ‘healthcare’. ‘Recession proof’, ‘underdeveloped’ and ‘large addressable market’ are phrases that almost certainly ensue.

Let’s focus on education to try and understand where the real opportunity lies. India’s young population and the average Indian households’ propensity to spend heavily on education have been well documented. So are the systemic shortcomings and inefficiencies. The size of the education sector may not come as a surprise; considering each one of us has either spent or continues to spend on education. We estimate the Indian education sector’s market size at $50 bn annually. Except for some sub-segments, theoretically the sector is indeed recession proof. The sector continues to be heavily regulated, especially schooling and higher education; however, private firms have been extremely adept at circumventing antiquated regulations to create opportunities for themselves.

VC/PE investors naturally recognize the potential returns investing in this sector can offer. Based on proprietary research by our education sector team, we present a ‘below the hood’ peek into the sub-sectors that form the education pie-

1. School/College Management – If fund managers had their way, they would probably want to run a chain of schools (K12- Kindergarten to class 12) or colleges, with what ever focus (premium vs mid/low income) they deem fit. However, owing to regulatory & to some extent social obligations, schools and colleges in India have to be managed by a not-for profit entity (trust), thereby forcing ‘for profit’ enterprises to largely stay away from the ‘business’ of schools.

Recently we have seen investments by funds in pre-school chains and several private companies engaged in allied businesses taking ownership of school management. Some companies have worked their way around by differentiating the school ownership entity (trust) & school management entity which profits from land lease rentals, supply of IP, hardware, etc. However, we do not believe that school/college management is an attractive investment proposition for funds under the present regulatory conditions.

2. Information and Communication Technology (ICT) for Educational institutions:The ICT opportunity comprises technology solutions for learning, hardware, infrastructure, multimedia content, institution & student management systems, etc, for K12 and higher education.

The ICT business has matured, with strong competition between the established (mostly funded or listed!) players such as Educomp, Everonn, IL&FS ETS and NIIT. However, the addressable market is extremely large and there is an opportunity for atleast a few other players to occupy and service various niches in the space. Content on a standalone basis, we believe is difficult to sell to schools/students and most of the ICT/technology player’s have setup proprietary content development teams.

While ICT is an obviously large market opportunity, we believe that the key to scaling up is the ability to sell to government. Private schools may fetch higher margins, but the sheer volumes that government sale offers is vital for a private ICT player to scale up. Moreover, higher education, which has no nationwide common syllabus like ICSE/CBSE, is also largely untapped by ICT players and presents a potential opportunity.

3 3. Test prep and Tutorials: Test preparation coaching and tuitions have co-existed with traditional teaching and are an integral part of the Indian education system, especially in urban India. The apparent problem is scalability, especially with tuitions & test prep which tend to be built around individual(s) or at best limited to a particular region. Several test prep institutes such as Career Launcher and TIME have received PE funding. However, we believe that beyond a point scalability will become difficult for brick and mortar only model because of issues such as consistency of coaching, franchisee model pitfalls, real estate costs, etc.

Our hypothesis is that there is an opportunity for a nation wide test prep play through a strong blended model, combining brick and mortar with online delivery. While there is no success story yet to demonstrate this, with a clever combination of easy to use technology and good execution, we will witness a few success stories in this space in the coming years.

Online tuitions for school students we believe, is also catching up and scaling up is relatively easier. The nay-sayers can use statistical data about broadband penetration being low, but the absolute number of students using internet as a source of knowledge has gone up and there are only a limited number of tuition/coaching providers who are catering to them through the blended model.

4 4. Vocational Training: Nasscom and every other survey on the formal education system in India highlights the huge gap between employability and skill levels graduates in India possess across sectors. Be it IT, retail, financial services or BPO, companies spend huge amounts on training to make graduates productive after hiring them. The NIIT’s and Aptech’s have to a certain extent been successful in addressing the needs of the IT industry over the years. However, from English language training to financial analysis skills, the gap is still huge for the vocational training market. Recently, classroom based programs in English language training, BPO, Retail training, etc have been scaling up and have attracted investments as well. However, our hypothesis is that just like in the Tutorial/Test Prep space, a pure brick and mortar model will have scalability issues. A blended model with contact centers and online delivery (either web based on through VSAT networks) is more likely to scale up. Moreover, vocational training firms are now looking to tie up directly with universities and offer courses to students, which is also an interesting model to watch out for. Companies that have a placement services background seem to be in a better position here, including Edserve (recent IPO); nevertheless, the question of ‘recognized’ certifications needs to be addressed.

5 5. E-learning technology and content development: Within the outsourcing space, Indian companies have developed capabilities in development & consequently implementation of E-learning initiatives plus learning management systems (LMS) for corporate clients as well as educational institutions. The development and conversion of content for publishers & educational institutions, especially for the US market is also an opportunity that a few Indian companies like Excelsoft have targeted very successfully. These services are rendered mainly by small to mid size companies, but some of the big software vendors have strengthened these verticals lately. This space continues to be fragmented and smaller players may find it difficult to scale. However, mid sized players have high margins and good expertise and are well positioned to make inroads into markets outside the US. We believe mid sized players in this space present a low risk investment opportunity for PE funds.

The sectors discussed above are not exhaustive; however, a majority of deals one is likely to see in the education space will fall into one of these buckets. As in any investment, the quality of the management team is probably the most critical factor, apart from the market opportunity they are addressing. For more information on education sector opportunities and interesting companies in the space, please contact Aravind G.R (aravind@viedea.com) or Deepak Srinath (deepak@viedea.com).

Retail debacle:

2009-02-12T11:13:00.007+05:30

‘Bird of Gold’ with reference to the ‘Soney ki Chidiya’ , a mascot of sorts to the Pantaloon Group and title of the famed report by Mckinsey, perhaps was the defining phrase for the Indian retail story, until now!.

We were always being served by the local kirana shop (there is one such store for every 100 people) and then came the era of organized retailing. The promise of a bird of gold in the hands of the burgeoning middle class seemed so easy to catch, for all those who had deep pockets (capital). However, Subiksha and Vishal have recently announced closure of one third of their stores. Reliance, Tatas & Birla have almost shelved their expansion plans & are about to close many of their existing outlets. The third quarter results of listed retail companies also depict their precarious state of operations.

Declining margins may be attributed by some to increasing costs of debt & real estate (yes, most of the retailers had locked in their rates) but explaining decline in sales is hard. Same Store Sales growth (once you remove sales due to new stores added) reveals that the actual sales have not just slowed down, but declined. The Indian growth story was largely fueled by the increased spending by middle class hypothesis, this decline in sales should come as a serious blow to the ‘strong fundamentals’ theory.

‘Bottom of the Pyramid’ now seems like a mirage, but we believe it is not. The consumption story of India remains, but organized retail is loosing its part in it. The problem, as R Subramanian (MD, Subhiksha) puts it, ‘Indian retail was doing too much, too soon’. Companies poured in billions of rupees into building outlets at a frenzied pace. Reliance had plans of 2,000; Subhiksha actually opened 1,500 outlets in 2 years; Pantaloon opened dozens of new formats (including one which was supposed to sell candles). All of this ‘leveraged’ investment happened at the front end, whereas the modern format of retailing relies heavily on the backend (supply chains); except a few like Pantaloon & Reliance, none of the retailers invested & strengthened their supply chains. Now, Subramanian admits ‘It was no wonder that, for most new entrants, the expansion was a disaster waiting to happen’. These retailers who faced increased costs in goods, salaries and through inefficient supply chains; were pushed to increase the prices, thereby not delivering on their promise of being the cheapest seller. We started going back to our trusted old friend at the street corner shop.

The way out (is there one?) or the way going forward- Those who continue to deliver the promise of being cheap & efficient will continue to thrive on gold. Cutting costs and reworking their system is top priority for the retailers who are hurt. We believe that a sound retailing model should always be backed by support/supply system, without which the advantage of organized retail format is lost.

LPO Prospects in India

2009-01-06T12:58:00.003+05:30

If you are wondering whether the current economic slowdown has spared any industry, you will be pleasantly surprised to hear the answer – Yes. Legal Process Outsourcing (LPO) industry seems to be the one which is actually benefiting from the economic crisis! As the corporates and law firms themselves are struggling to trim their cost structure, LPO business is set to benefit from it. One obvious, rather a more meaningful choice for the corporates and law firms abroad is to consider outsourcing some parts of their legal and administrative work to a low cost destination like India where people have no dearth of talent too. However, it is good to understand whether we are fully equipped to reap the benefits from the present opportunity.

LPO as an industry in India is in a nascent stage. The industry is highly fragmented with over 100 firms operating in different verticals. According to a report by ValueNotes, the revenues from legal services offshoring are forecast to grow from $146 million in 2006 to $640 million by the end of 2010. Forrester Research projects that $4 billion in legal work is likely to come to India by 2015. Currently, the size of the industry is small (especially, considering the number of players operating) but the growth prospects are good. It is obvious that many entrepreneurs jumped in to catch a pie of this lucrative industry. But the fact is that only a handful of companies in India are doing well and most of others are still small and suffering. The lack of preparedness while staring the business has led to quality issues as well.

No doubt the industry holds tremendous prospects, but it is critical to understand the industry dynamics which are specific to LPO. Cost benefits are definitely a top consideration for the firms who would like to outsource legal work to India. The cost of getting work done from India could be as low as 20% of what it is in the US. Availability of manpower is not a big constraint in India as thousands of students graduate from Indian law schools and engineering colleges (engineers are needed to execute work related to IP/Patent research). However, training them to carry out the foreign legal work is important and this needs investment. Association with a foreign law firm would be extremely helpful in building the LPO business. This helps in knowledge transfer as well as assurance as far as client base is considered. Signing in a legal client is not a simple task unless there is some backing by a foreign legal firm or you have sales persons who are well connected in the industry.

There is interest from the investor community in the industry. Firms such as Clutch Group, Pangea3, United Lex, Mindcrest and TechLit have been funded by angel investors and VCs.

We believe that LPO is certainly a good space to jump in, but one needs to focus on certain key aspects to be successful:

Cost benefit is an obvious consideration while outsourcing – every player in the industry offers it. But being quality conscious is extremely important to be successful and to grow the business. The challenge for the Indian LPOs is to convince the firms outsourcing the legal work, about quality of output.
Investment in training and devising right training techniques is important.
Industry connection/network is critical – either through foreign law firms’ association or through a well connected sales force
Confidentiality - this is an important aspect any legal client would expect from LPO firms while executing the assignments. Therefore, implementing measures to take care of this and winning client's confidence is of great importance.

We also believe that as the industry becomes more competitive, small and inefficient players may be forced out of business and we could also witness some consolidation happening in the industry.

2008-12-10T22:23:00.001+05:30

Infrastructure Ancillaries, the opportunity for VC’s and mid market PE funds:

The size and potential of the infrastructure opportunity in India is evident from the number of large Private Equity biggies who are raising or have closed infra focused funds. A look at any research report suggests that the size of the opportunity for private sector investment is anywhere from $50 to 100 billion over the next 4 years.
Despite the obvious opportunity, it hasn’t exactly been easy going for the infrastructure sector over the last few months. Nearly every listed infra company has underperformed Sensex over the last 12 months. Value locked up in real estate land banks, rising interest rates, credit crunch, FCCB redemption issues, etc have all contributed to the sectors lack lustre performance.
However, we believe that the blip is temporary and should soon regain its buoyancy, other than maybe realty linked projects. The government’s infrastructure stimulus package, coupled with monster sized infra PE funds that are being announced – IIFI, Blackstone, Morgan Stanley, etc will all contribute towards the sector’s recovery.
While the story for bulge bracket PE funds such as 3i, Actis, Blackstone, IDFC, etc is fairly obvious, we believe there is a huge opportunity for VC’s and mid market PE’s, who are perhaps not giving it the focus they should. Typical infra projects such as roads, mega power plants, ports, etc obviously will not fit into a VC’s investment mandate; however, there is an emerging ecosystem of infra ancillary companies, many of whom re extremely innovative either in their business model or technology and these are ideal VC investment candidates.
We believe that that any VC funds looking to capitalize on the India growth story should focus on the following types of opportunities –
a. Logistics – Integrated Container Depots, Container Freight Stations, Agri warehousing, etc
b. Waste Management
c. Green Infra enablers – Eg: Neureol Technologies (Remote monitoring of energy infrastructure), InnovLite (LED lighting solutions), Gensol (Carbon Credit Advisory)
d. Social Infrastructure – Innovative Healthcare, Innovative Education
e. Innovative mid sized power projects

Well, the opportunity is real, and some funds are early movers already, as seen in the examples below. We at Viedea are building a database of interesting opportunities across these sectors. Please contact us for more information on our current mandates.

Attero recycling, Delhi- E-Waste Management- DFJ/NEA- $6.3 mn-Aug-08
Doshion, Ahmedabad- Water Management-IDFC PE-$8.5 mn-Nov-07
Emergment Ventures- Carbon Credit Advisory-IDFC PE-$10 mn-Apr-08
Kam Avida, Pune-Waste Management-Peepul -$4.5mn-Aug-08
Pesco Beam Solutions, Chn-Waste Mgmnt and Alt Energy-UTI-$8 mn-Nov-08
Direct Logistics-Freight Forwarding-SIDBI -$3.5 mn-Mar-08
Expressit Logistics-Specialty courier -SIDBI-$2.0 mil-Mar-08
HHV Solar, Bangalore-Solar Energy Equipment-SIDBI, Aureos-$7.0 mn-Mar-08
Natural Bioenergy, Hyd-Biomass-SIDBI, UTI-$4.0 mn-Mar-08
Servomax, Hyd-Power Equipment-Mayfield-$3.75 mn-Mar-08
Tecpro, Delhi-Captive Power-Avigo-$5.0 mn-Jan-08

Surviving the Downturn

2008-12-09T15:35:00.001+05:30

A lot has been said and written about the downturn across all media on how bad it already is or how bad it could get. The net analysis is that nobody has answers to these questions let alone coming up with solutions. The question then is how does one survive a downturn – the answers could be as complicated as the question itself or is it? An article in the Businessweek, has tried to map out businesses which had survived the ‘Great Depression’ and still continue to exist (and succeed).

http://www.businessweek.com/smallbiz/content/oct2008/sb20081016_825689.htm?campaign_id=rss_smlbz

Please press * to continue:

2008-12-02T18:05:00.005+05:30

‘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 Split of Rs 250
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.

PIPEs up in the smoke?

2008-12-01T11:47:00.000+05:30

The recent economic slowdown has taken toll on everything – pink slips are flying around, salaries have been slashed, people who have invested in stock markets have witnessed how their investment value evaporated with in a few months. Clearly, M&A and fund raising activities have slowed down and everyone feels that the present scenario might continue for a while though the recovery in India could be much quicker than that in the US.

I was wondering whether this is a good time for private equity players to pick up stakes in listed companies via private investment in public equity (PIPE) route. My thought was stimulated by a few reasons. BSE benchmark stock index has tumbled from almost 21,000 levels to 9,000 currently. Valuations across the board have become cheaper. Not just that, there are a handful of companies who had raised money through FCCBs few years ago and they have to repay some of them as maturity is approaching (conversion in many cases looks impossible unless the conversion prices are renegotiated). These companies need money. Above all, in August this year, SEBI amended guidelines for qualified institutional placement (QIP). The earlier pricing formula required investors to take an average price of six months or 15 days, whichever is higher. This was considered as a bottleneck for investments as the investors felt that this did not reflect the recent market conditions. The amended guidelines say that QIPs should be based on the average price of the shares two weeks prior to the issue. This was expected to boost PIPE deals in India. But I was surprised when I read an article on VCCircle, which stated that just one QIP has happened since April 2008.

Therefore, I went ahead to dig a bit further into PIPE deals. During 2007 when the markets were surging, the number of PIPE deals also surged unabated. A whopping $5.29 billion was invested through 63 deals in 2007. I think the institutional investors who are considered to be the most prudent, never saw a downturn in the market in the near future. But due to whatever reasons, the stock markets have collapsed by over 55% now. So, what is happening to those investments? According to an article in Financial Express, the current mark-to-market value of those investments is down 50.65% at $2.55 billion! As of the date of the article (November 17, 2008), only three deals (out of 63) were yielding positive returns. Manufacturing, IT&ITES and Real Estate have been the worst hit with over 70% erosion in value. However, Telecom and BFSI have somewhat withered the storm with less erosion in value of investments. Some investments like the one in GMR Infrastructure by a group of PE firms seem to have really gone bad. In December 2007, 10 PE firms including Eton Fund LP, T Rowe Price, Deutsche Asset Management and Citigroup had together invested Rs. 3,965 crore in GMR Infra at Rs. 240 per share. GMR Infrastructure stock was trading at Rs. 53.25 on November 28th on BSE.

So, what is the future course for PIPE deals in India? PE firms seem to be treading cautiously even though it looks like a good time for PIPE deals. In addition, even the companies may not be interested to dilute huge stake at cheap valuations at this stage unless they need money for simple survival. Hence, it’s unlikely that we would see the kind of activities witnessed in 2007 in PIPEs in spite of many positive market drivers. I always wondered why do I enter the stock market at the peak (typical retail investors’ characteristic) and lose the money immediately after that? Now, I am not the only one, I have the savviest investors with me!

Viedea starts blogging again

2008-11-27T10:54:00.001+05:30

We've always wanted to create a 'Viedea Blog' that will serve as a platform to debate issues relevant to our and our clients' businesses and expresss new ideas, research and analysis. More importantly we also want our blog to be an expresssion of the culture, ethics and aspirations Viedea stands for.

Despite the intent, it's been a year since we last posted something on this blog. The last 12 months have been a blur of frenzied start up activity. Finally the state of intertia has been overcome and we hope to post regularly. Ironically, it's one of the bleakest mornings in a long, long time - The unimaginable, mind numbing terror attacks Mumbai, the worst economic crisis anyone can remember, and a Manchester like gloomy drizzle in Bangalore- all contribute in good measure. However, there is a strange spirit of resilience, of not giving in, of not letting anyone walk over you, of the urgent need to harness all that is good and fair and ultimately succeed the 'right way'.

Our posts over the next few days will cover topics such as the impact of the global finacial situation on VC/PE funding in India, an analysis of Mobile VAS investment opportunities, buyout opportunities in the current market, etc. Contributors will be Viedea team members as well as industry experts. Keep reading!

What does it take to fund your startup?

2007-11-23T17:01:00.000+05:30

Entrepreneurship is clearly the "cool" thing to do in India these days. The sheer number of entrepreneur focussed events and forums one hears about and the large and passionate audience at most of these events is ample testimony to this. However, the first hurdle a budding entrepreneur needs to cross is "funding" to give wings to his/her dreams.

A slightly tongue in cheek look at Rules for fundraising:

1. The team - This is probably the most important factor in the ability of a company to raise funds. If the team has "star" power, meaning previous entrepreurial or corporate fame (or notoriety) then the company is almost certainly guaranteed funding. If the team comprises lesser mortals, then the founding team better be a really smart bunch to get a look in.

2. Stage - There is very little seed capital in India and almost no concept stage funding. You need to build something and have some proof of concept before you can approach Seed Fund or Indian Angel Network (the exception to this caveat is the "star" power mentioned in point 1). If you want money to build your proof of concept, self-funding, family and friends in that order is the best way to go.

3. Sector - This is critical; Instead of coming up with bright ideas in sectors in which you have experience and spot a potential opportunity, it may be wiser to analyse which sectors VC's are funding and then come up with an idea. In the current scenario, if you are consumer internet or to a certain extent mobile VAS company, you can raise early stage VC money before generating revenue. However, if you're selling to enterprises, you better be atleast $ 2 million in revenue before you can think of VC funding. Sector and stage are closely tied together in India.

4. Valuation - DO NOT believe the funding amount and valuation numbers you read in the press. Most press releases report inflated numbers. Be realistic about valuation, if you are an early stage company it would be rare not to dilute 25-30% in your Series A round.

5. Time and effort - It takes a helluva lot of time and effort to raise funds, whether it is 50K or 5 million. Do not expect fundraising to be easy. If you dont have the heart for it, stick to family money or better still, stick to your cushy corporate job.

A note on mobile social networking

2007-03-21T16:29:00.000+05:30

An introduction

Mobile social networking, as defined by Wikipedia, is “one or more individuals, with similar interests or commonalities, conversing and connecting with one another using the mobile phone”
Broadly speaking, mobile social networks can be classified into 3 categories:

-Mobile extensions of existing internet social networks
-Mobile centric social networks with a web component for registration and user profile management.
-Mobile-only social networks with no web interface

The media buzz around mobile social networking has been more about online social networks such as MySpace and Facebook building mobile extensions to their online communities, rather than social networks that are mobile centric or exist purely on the mobile side. A social network that exists purely on the mobile side may have many limitations around usability and features. It is fairly obvious that mobile is a perfectly complimentary angle to internet social networks, but whether mobile social networks can exist as a stand alone model without any web component is debatable.

It can be argued that the success of sites like Youtube is more to do with the 'metadata' than the content. Be it Saddam Husseins' hanging or a Brazilian model cavorting the beaches of Rio, it's easy for users to tag it, post comments, send the link to friends and find other clips of public hangings or Brazilian models. The big question is how does one manage this with the screen size and usability limitations of a mobile phone? As Charles Golvin, Principal analyst at Forrester Research says, the model of building an online social network and extending that to mobile is far more likely to succeed than building a mobile-only social network.

Even social networks that are centered on the mobile phone, such as Playtxt and Dodgeball, use a web interface for registration and profile management and are not mobile-only in that sense . A few purely mobile-only social network services do exist, such as the SeeMeTV service on 3 in the UK or mobile blogging services on many operators around the world. However, it can be argued that these are not so much ‘social networks’ as channels for user generated content. The social interactivity elements for these services come from users rating video clips or tagging them.

Success factors

For any stakeholder or potential stakeholder in a mobile social networking service, it is important to have some background of social networking theory. The same 'sociality' theories that apply to the real world or online world extend to the mobile world. This knowledge of social networking theory will certainly help VC’s and entrepreneurs decide whether a particular idea will succeed or not.

The older theory of social networks simply looks at social networks as a map of relationships between individuals. This 'Social network' theory is good at representing links between people but it doesn’t explain what connects those particular people and not others. A number of existing online and mobile social networks are based on the “friends of friends” model that is derived from this.

However, a more recent theory called Object Centric social networking believes that people don’t just connect to each other, they connect through a shared object. Sociologists such as Karin Knorr-Cetina and Jyri Engestrom advocate this theory and believe that 'social networking' makes little sense if we leave out the objects that mediate the ties between people. Objects are the reason why people affiliate with each specific other and not just anyone. For instance, if the object is a job, it will connect the user to one set of people whereas a date will link to a radically different group. These sociologists believe that this is common sense but unfortunately it's not included in the image of the network diagram that most people imagine when they hear the term 'social network.' The fallacy is to think that social networks are just made up of people. They're not; social networks consist of people who are connected by a shared object.

The older 'social just means people' model provides a format for representing people and links, but no way to represent the objects that connect people together. The social networking services that really work are the ones that are built around objects. An object can be a place, date, job, or even content like videos (YouTube), photos (Flickr), URL’s in the book marking network del.icio.us and events in the event publishing network SEraja (www.seraja.com).

The object-centered sociality theory can be used to identify new objects that are potentially suitable for social networking services. An example is the use of ‘place’ as an object. With the advent of mobile technology, services such as dodgeball or Plazes which provide cheap and reliable ways of capturing “place” have a good chance of succeeding.

In conclusion, evidence strongly suggests that passive social-networking services that merely aggregate our friends, and their friends, eventually lose their luster. Statistics show that a majority of users who register for sites such as Linkedin or Orkut become inactive after 3 months.

Revenue models

Monetizing the network may actually be less of an issue for mobile social networks than it is for online social networks. One obvious source of revenue for mobile social networks in the data charges that all operators levy. Increased usage of mobile social networking services will mean that people sign up for higher data plans or pay for increased SMS usage. However, as with all mobile Value Added Services’ the operators are the ones who will benefit the most from this. What percentage of these revenues can social networking service providers get is the question?
The answer may lie in a hybrid of Premium SMS and phone based application. For example, users send PSMS to get some information for free (there are 3 women who match your profile in the vicinity) but has to pay a small fee to find out who they are and get contact details.
However, business models in the mobile social networking world are far from clear and may eventualy see the emergence of a advertising based models in the near future.

Disclaimer : I have read several articles and white papers on social networking for this blog, and have used theories originated by other authors. I do not claim originality for the theories mentioned in this article.

m-payments- a good investment opportunity?

2006-11-22T20:24:00.000+05:30

The buzz about m-payments

Mobile payments or m-payment are not new buzz in India; attempts at creating m-payment solutions go as far back as 1999 and has even seen some VC investment in the space. However, the market was clearly not ready for it and m-payment was more a conceptual experiment than any real paradigm shifting opportunity. The second coming of mobile payments in recent months is an entirely different story. It has the backing of a 135 million user base that is growing at 5% a month, and a retail economy that is poised to take off into stratosphere.

m-payment is a broad term for any mechanism that allows a user to make a payment for a service or goods, or transfer money to another person using a mobile phone. The m-payment solution typically works in conjunction with an existing bank account or credit card the user holds.

The basic hygiene factors for an effective m-payment solution are:

- Ease of use
- Maximum device support to cover a large user base
- Support for a number of banks or credit cards
- Security
- Large merchant base

m-payment providers in India:

The m-payment space in India has seen two recent investments by leading VC’s. Sherpalo Ventures and Kleiner Perkins Caufield & Byers, two of Silicon Valley’s most reputed venture capital firms invested about $5 million in Paymate, a Mumbai based m-payments solution provider and Helion Ventures invested $2.2 million in Ji Grahak, a Bangalore based m-payments company.

Paymate and Ji Grahak offer very different solutions and a comparison is shown below:

Paymate:

SMS based, no GPRS connection needed.
Currently available only for Citibank credit or debit card customers
Works on almost every phone model in India
No need to enter and submit credit/debit card details on the phone
Current model will only work for online purchases
Person to person payments currently not supported

Ji Grahak:

Needs GPRS and a java client to be downloaded
Currently available for any credit card holder
Works only on high end java phones
Need to enter credit card details at least once on the phone
Current model seems online focused, but no real clarity
Person to person payments currently not supported

The fact that Paymate works on any phone model with SMS capability, does not require the user to hold a credit card and works without GPRS makes it appear to be much more compelling proposition than Ji Grahak. Moreover, Paymate does not require the user to enter or submit card or account details over the phone, another huge benefit in India where consumers are only just beginning to become comfortable with using their credit cards online. The only advantage Ji Grahak seems to have in the short term is that it supports any credit card and is not restricted to Citibank customers. However, this may not be such a great advantage as Paymate signs up more banks eventually.

In the long run however, as data usage in India becomes more widespread (GPRS), the Ji Grahak solution offers a much more secure infrastructure for payments than Paymate’s simplistic SMS based solution. Moreover, a Java client on the phone also provides scalability in terms of exchange of information with Point of Sale (POS) systems to purchase goods in physical retail stores should Ji Grhak go that way.

While the Paymate model seems to be more in tune with Indian market needs than Ji Grahak, it still needs to address several issues in order to have a chance of success. For starters, the current model only supports on-line retailing, i.e, the user browses a web site such as rediff.com and decides to buy an item. When the user reaches the purchase screen she is presented with the option of paying via her mobile phone and enters her mobile phone number and clicks submit. If the user is a pre-registered Paymate user, then an sms is sent to the users phone with the item code and the user needs to reply with the item code and PIN number to confirm the purchase. Secondly, SMS is inherently not very secure and it’s not uncommon for messages to get lost or remain undelivered.

The biggest hurdle faced by both paymate and Ji Grahak is extending the model beyond online retailing to physical store retailing. The big advantage of m-payments in the Indian context is that it takes advantage of high mobile penetration to provide an effective alternative payment method to cash. So what exactly is the benefit of solutions that merely displace the last click of an online browse and buy transaction?

And from an investor’s point of view, what is the revenue model for m-payment providers? Both Paymate and Ji Grahak are free of charge to the user; does the merchant pay them for every transaction? Can they break even with only online merchants?

A third m-payment solution, mChq, and has been around for over a year now. This is again SMS based but the transaction process is one where the retailer/merchant sends an SMS mentioning the amount to the customer. The customer enters his/her personalized PIN number and sends an SMS back to the retailer acknowledging the amount to be paid. Both the parties then get a confirmatory SMS indicating the completion of the transaction. The mCheq solution addresses physical retailing more effectively than paymate or Ji Grahak. mChq pilots were launched by ICICI bank and Visa cards and SBI also launched a solution on the platform subsequently.

Are m-payment solution providers a good investment opportunity for VC’s?

There is no big m-payment success story anywhere in the world today, barring maybe Japan. Having said that, India probably has the best chance of producing an m-payment success story. Market factors for an alternative payment mechanism to cash are clearly evident – high mobile penetration even in tier-2 and 3 cities, relatively low credit card penetration (98% of transactions in India are cash and cheque), a relatively low internet user base and rising middle class consumption and disposable income.

The biggest challenge will remain consumer adoption. The market is large enough to support 3-4 m-payment solution providers with different solutions that cater to different consumer segments. Moreover, competition is essential to create consumer and merchant adoption on a mass scale. Several m-payment solutions are likely to emerge in the next few years in India, as the market evolves and lessons are learnt. From a VC investment perspective, a solution that effectively addresses the hygiene factor of m-payment and then goes that extra mile, and a management team that has strong networks with the banking community are certainly worth taking a closer look at.

Mobile VAS event in Bangalore

2006-10-28T19:14:00.000+05:30

I'm moderating a panel titled “Raising & Leveraging Venture Capital ” at Venture Intelligence Mobile VAS Connect, a Roundtable focused on Venture Capital opportunities in the Mobile Value-Added Services sector. Details are below...

Mobile VAS Connect
December 12, 2006 Bangalore

The Mobile VAS sector has emerged as one of the favorite sectors among venture capitalists. However, there are several significant challenges facing the sector - including in the basic business models being adopted, relationships with operators, etc.

In this context, Venture Intelligence Mobile VAS Connect, scheduled for December 12 in Bangalore, presents an ideal platform for leading Venture Capital investors and top executives from Mobile VAS companies to network, discuss and share best practices.

Confirmed panelists include top executives from Sequoia Capital India, mportal, Nazara Technologies, Paymate, ACL Wireless, Phoneytunes, Mobile2win, etc.

This event also features Venture Intelligence DEMO, where select technology companies showcase their products in the form of demos.

Who Should Attend?
- Venture Capital funds looking to invest in IT and Mobile Services companies
- IT and Mobile VAS companies planning to raise VC financing

For more information, visit http://tsjmedia.com/ev-121206.htm

Mobile Search, yet to come of age...

2006-10-22T11:36:00.000+05:30

Mobile search is such a hot topic right now that you cannot open a wireless magazine or newsletter without search related articles screaming at you. It's not just the bigges like Google and Yahoo who are making all the noise, there are numerous start up's each claiming to have the killer technology to offer the best user experience. I personally have met with four mobile search start up's in the past week, all based out of Bangalore.

Mobile search is a broad umbrella that has various niches- content search on WAP portals, localalized and location based search for information, paid search, unpaid web search, sms based interactive search, voice based search, etc. In the mobile content world, offering consumers easy, intuitive content search capabilites are thought to be the most important factor for increasing usage given that efficient content discovery is so difficult on the limited real estate available on the phone screen. Apart from using search for content discovery, building models for paid search is a as bandwagon everybody wants to jump on.

Intrigued by all the noise about mobile search, I decided to use the search capabilities on O2's WAP portal in the UK (O2 active), a few days ago. My experience left a lot to be desired and clearly mobile search has a long way to go before it becomes the goldmine it is predicted to become. I record my experience below and hopefully very soon this will sound like people talking about their dial up internet days in todays broadband world :).

"I read about MTV's listing on O2 active and tried finding the MTV link on O2 Active a few days ago. Browsing the portal under the 'entertainment' section did not help me find it, I decided to use the FIND tab at the bottom of the page. I typed in MTV in the text box, clicked on FIND and was taken to a search page powered by Motionbridge, a white labeled mobile search provider and then I was being redirected to an ….mtv.co.uk WAP page when an error message popped up on my screen saying 'file format not supported' and was left stranded on a page showing “connectibg to mtv, powered by motionbridge”. Hmm…

I clicked on the back button and went back to the FIND tab and typed in 'beatles ringtones'. This time I was taken to a page that said "results for beatles", via the Motionbridge intermediary page, and was shown a listing of truetone and ringtone categories - recommended O2 hot picks, Scissor Sistors, The killers, and some general categories such as UK top 10, best sellers, More charts, Artists and Bands, etc. I went down a level on each of the links displayed and could find NO mention of the Beatles. Finally at the bottom of the bottom of the listings page, there was a text box with the prompt “search for 20000 ringtones”. I again typed in Beatles and was taken to a page with 23 Beatles polyphonic tones and wallpapers listed. NOTE – this second search was not powered by Motionbridge and finally showed me relevant content. Phew! It took me a good 10 minutes and innumerable clicks to find what I wanted. "

Surely, mobile search, even in its most basic form, can only get better from here. However, improved user experience is not a concern, that is bound to happen very soon. My bigger concern is revenue models for the search start-up's that are dotting the landscape from Seattle to Cambridge to Bangalore. None of the search start-up's I spoke to had a convincing revenue model thought through.. Even more fascinating is the amount of VC money these search start up's are raising without even a half baked revenue model. And of course, the big bad wolves named Google and Yahoo are waiting to gobble up all the small furry animals in their path...

Building destination brands for D2C success

2006-09-18T17:30:00.000+05:30

The big issue with Direct to Consumer mobile content retailing has been and continues to be the problem of getting enough consumers to find your service. Print and TV advertising are the most popular above the line marketing channels used world over. Some players with deep pockets managed to build pure play mobile media brands, mainly in Europe. Jamba/Jamster, Zingy and the Mob stand out here. However, a vast majority of players who saw D2C mobile retailing as a quick and easy way to make big bucks have met with varying degrees of failure. The high cost of customer acquisition, lack of ability to retain a customer without sneaky underhand “crazy frog” like methods, inability to differentiate and low margins due to too many players in the food chain, unsupportive operator policies have all been responsible for this.

I personally have been in involved in D2C services across several geographies for different types of mobile content and themes. Above the line marketing, integrated with movie releases or TV shows campaigns, or standalone print and TV campaigns, have not really set the cash registers jangling. Even with better messaging, targeted ads, clever merchandizing (value bundles, etc), the response has only marginally increased. Even Europe, with all the D2C hype I’ve heard over the years, seems to be operator portal dominated in reality, more so for mobile games.

So with the wisdom of failure backing me, a few ideas are beginning to emerge about how the mobile D2C space will evolve:

1. Merely running a short term ad campaign on the TV or in a magazine and expecting thousands of people to buy your stuff will simply not happen. Nobody remembers a shortcode even 5 minutes after they’ve seen or read the ad, leave alone the keyword or URL.

It really is about a long haul brand building campaign. Isolated mobile only strategies are unlikely to succeeed. Media brands need to build “destinations” with mobile content strategies integrated with overall digital media plans and provide the consumer access to multiple consumption channels. These “destinations” are more likely to be integrated web and mobile brands rather than stand alone mobile brands.

2. Big media companies with deep pockets have the best chances. The mom and pop content kiosks and the medium sized short term players may make their pennies, but can hardly expect to survive in the long run.
A News Corp and Viacom through their multiple media destinations or an MSN and Yahoo through their strong web destination brands are more likely to be the mobile D2C dominators rather than the first generation players like the Mob or Zingy. Evidence that the world is moving towards this comes from the recent NewsCorp acquisition of Jamster.

4. In India, Indiatimes got the dynamics right from the beginning. Their shortcode 8888 is probably the only genuine mobile “destination brand” in India. Web and print properties have been exploited brilliantly to create an integrated destination for mobile content. Yahoo mobile in India is trying to get there and should, given their deep pockets and captive web user base.

In a recent meeting I had with the world’s biggest game publisher, they emphasized that their strategy for D2C was to build “destinations” for mobile content around two of their biggest game franchise brands. The discussion we had validated my own thoughts on D2C.

The gaming phone is still alive

2006-09-10T22:21:00.000+05:30

I thought with Nokia's N-gage experiement had put the skids on the gaming phone experiment. Last week I came across this in Paddington station. Very interesting, shows operators and handset OEM's still see the core gamer as a big enough demographic to position phones specially for that segment. Actually, I do see the sense of it, given that mobile gaming has been dominated by casual gamers, there must be a large community of core console and PC gamers out there who are untapped. With more sophisticated handsets and better quality mobile versions of console games, I can see why Operators still believe in the gaming phone. Isn't Sega owned by Nokia though?? Wonder what they're doing on a Sony Ericsson :)!

Innovative distribution models for mobile content emerging in India

2006-09-06T14:56:00.000+05:30

Some time back I had posted a blog on the importance of alternative (non GPRS) distribution channels to drive mobile content sales in markets like India with extremely low GPRS penetration and highly price sensitive customers. Pantaloon, though its Big Bazaar retail outlet has done just that (See article from Contentsutra pasted below). My big issue though is I'm not clear from the article whether the content is still delivered over the operator's network. If this is the case, users without GPRS can only download mono ringtones and the solution only helps Pantaloon and the content owner make more money by doing away with the operator's cut for PSMS billing. I don't see any real value propostions for the end consumer. On the other hand, if the content is delivered using bluetooth or some other point of sale chanell, then a much wider consumer base can be covered and offered a greater variety of content.

Airtel had already started the trend with their Airtel Easy Music outlets, which allowed subscribers to purchase songs and ringtones for their phone from their retailo outlets. I think this is an interesting experiment from Pantaloon and something that can become a major distribution channel for emerging markets, at least in the short run. Regional language voice portals and IVR based browsing in regional languages is another trend I'm keeping my eyes open for.

One97 And Pantaloon Launch Universal Ring Tone Card
By Nikhil on Wed 06 Sep 2006 09:02 AM IST

First Airtel went the retail way with Hello Tunes and MP3 songs from Soundbuzz being made available at Airtel Easy Music outlets; now One97 has launched an all operator, all mobile ring tone card which is being retailed at Pantaloon’s Big Bazaar stores.The ring tones are availabe in single tone (Rs.6) and three tone(Rs.18) packs at Big Bazaar stores. Users have to send a unique 10 digit PIN alongwith their preferred ring tone(s) code via SMS to 9871330303, and avoid the premium SMS and call charges. The card has a 6 month validity. One97 also has plans for more ring tone cards, Astro cards and regional ring tones.On the face of it, it looks quite convenient and cost-effective, but that’s because premium SMS and call charges are are high with the operators cut being a major component. I wonder how many people actually will be picking up ring tone cards alongwith their tomatoes and onions. My guess is that the cards will be placed near the checkout counters, as impulse purchases, next to other impulse-purchase favourites like razors, chocolates and chewing gum.

User generated content - my new addiction!

2006-08-15T18:03:00.000+05:30

As anybody in the digital media world knows, nothing is as hot as user generated content these days. I for one, had been slightly skeptical about why people would pay to watch grainy, out of focus videos of some drunk guy singing to his mates, or some supposedly funny fake gag. However, much to my own horror, I find myself a user generated video junkie today!

It all started on the day O2 finally activated my O2 Active. Browsing through their deck, I came acorss a link called LookatMe! What's this I thought and jumped right in. It said "We've got some of the coolest videos and they've been created by people like you on thier mobile. Some are earning serious cash in the process! Think you can do better?". Below this was a preview image of a video with a "buy for 35p" link and a "vote link". 35 pence, I thought, that's nothing, let me check it out. Clicked on buy and in a few seconds I was watching a dude in white trying to do slam dunks for about 50 seconds. It wasn't particularly funny or well shot. The point however is that it was priced so low that I didn't mind ending up with a lemon. So I clicked back to the home page and found a few search categories -most watched, most recent, by same contributor- and randomly downloaded a few more videos. Some funny, some really bad, some downright bizzare.

In a couple of hours I found myself back on the same page, downloading more videos. Soon, everytime I had some time to kill I was shelling out 35p for some vidoes. Before I knew it I was hooked and then I asked myself just why I was so hooked on downloading mostly bad videos. Two thing struck me - 1. Humans are fundamentally voyeurs. We like to peek into other people's lives; like a fly on the wall, observing unobtrusively. 2. We are all suckers for low price points, low price points encourage impulse purchsases

LookatMe has got their model right! Low price points are sustainable because of volumes and not having to pay hefty content publisher or rights owner revenue shares.

O2 active - am I rich enough to download?

2006-08-14T14:44:00.000+05:30

So I finally managed to activate GPRS on my O2 phone and was very excited about checking out O2 Active, the operator's home portal. The portal looked rather plain and lacked "the look", but I figured the design was functional and that was more important than cool looks. The categories were all standard and and pages loaded really fast. So the browsing experience was far better than anything I'd experienced before, either in the US or in India.

What shocked me though was just how expensive mobile content downloading was (leaving aside data charges). All the games listed under games arcade were retailing at £5.00. Moreover, there were no previews, no trials, only a text description of the game, followed by the option of clicking "buy" and getting charged £5.00. Hmm, interesting! I'm paying £5.00 and I don't even know what I'm getting. Any wonder operators and game publishers are crying about mobile game sales stagnating and % of game users remaining low (despite fervent denials of any such thing from the big boys of game publishing!). Just imagine how many more browsers will convert to purchasers if they could trial the game before purchasing it, or if they could "rent" it at a lower price point. I would bet on an increase in conversion of at least 30%, if not more.

It wasn't just games that were expensive. Wallpapers, standard celebrity wallpapers and even some really crappy non-celebrity ones were going for £2.00, ringtones for £2.50 and truetones for £3.50. Way too expensive for mostly 'not so hot' content.

The one big surprise though was that video was priced so low! Most video clips, typically from TV shows and comedy clips, retailed at only £0.75, which was great. I did not even think twice before downloading videos at that price point. I'm not sure whether the low price point of video is because O2 is trying to promote video downloads or whether revenue share agreements or rights acquisiton costs allow videos to be retailed so low. The important point though is that the price point is low enough for impulse purchase, which is key to driving volumes and getting more people hooked to content downloading .

I'm hoping O2 and the other operators crack the pricing conundrum soon.

Different country, same story - My heroic GPRS enablement saga

2006-08-10T19:44:00.000+05:30

So here I am in the UK, supposedly one of the most advanced mobile content markets in the world. I ordered myself an O2 contract phone (Nokia 6230i) online, and was assured that to activate GPRS all I needed to do was call the helpline and ask them to activate it.

As soon as I got my phone last Wednesday, I called O2's helpline and asked for my GPRS to be activated. The woman at the call centre took down my phone number and a few other details and said that I would receive an SMS with the settings for GPRS. Thank you very much, simple enough! After waiting for an hour and no SMS in sight, I called again and went through the same process. Still no SMS. Finally, I decided to check the O2 website and found a simple form which needed to fill out to get the settings on my phone. As soon as I filled in the form and hit submit, the much awaited SMS finally arrived. Great going I thought, and opened the SMS and went though the instructions to instal the settings on my phone. Everything went smoothly and the settings were indeed installed. Sadly though, when I tried to access O2's home site, I was told that GPRS was not available for this connection.

Many calls to customer support followed, bulky documents were emailed to me and many experiments were made. GPRS remained elusive still. Completely frustrated by now, I walked into an O2 store today hoping my problem will be solved. Two store assistants came by one after the other and simply said that I need to talk to their customer support. They were kind enough to call customer support and hand the receiver to me. Thrice I was informed that I had got through to the wrong department and was transfered to some other call centre agent. As I was getting ready to leave and throw my phone into the Thames, a senior person, presumably the store manager walked upto me and asked if he could help. I wanted to say, "most definitely, please show me the way to the river", but instead explained my problem to him. He said "please come with me sir", much like a police inspector leading you to detention room and called up a number from his phone, which I suspect was a hotline to the GPRS god. A 30 second conversation followed during which he gave my phone number to the GPRS god and I was told that GPRS was now active and handed back my phone with a flourish. In a feverish daze I fumbled and clicked on the "web" button on my phone and MAGIC, there it was ,the O2 Active home page!!!

What on earth is going on? Why can't Operators/ handset vendors preconfigure phone for internet access? Especially given that O2 and other operators in the UK charge per kb of data usage and not a monthly data subscription like other markets. The next time I'm asked what needs to be done to increase mobile content revenue revenue, I'm just going to grab the fellows phone and throw it into the river!

More lies and fantasies..

2006-07-10T15:11:00.000+05:30

Business Standard and The Hindu carried an article on July 7, 2006 about mobile content revenues in India touching $5 bn in the next 2 years. The figures come from the ‘second international conference on VAS’ held in Delhi (?). The article makes vague references to contextual applications like “advertisers projecting ads at the right moment in entertainment videos” and “cultural marketing” as possible drivers for this stupendous spurt in revenues from the current sub $10 million levels.

I agree that positive spin is necessary in every growth industry. But these numbers are in the realm of fantasy. I’m tempted to ask what the person who quoted these numbers was smoking when he dreamt them up? As mentioned in a previous blog, grossly false numbers are a big issue plaguing India’s mobile VAS industry. I think in the long run, this blatant inflation and false projection will hurt industry players where its really painful. One can foresee a scenario where investors become extremely wary of putting in the money for innovation and infrastructure, which are vital to spur legitimate growth in Mobile VAS sector. Yes, mobile VAS is growing in India and will eventually be a major revenue generator. However, the industry need to be realistic about time frames for this. Here’s hoping that some sense prevails and business writers do a sanity check before publishing articles with blatantly false growth stories.

Why mobile games need smart retailing..

2006-07-07T16:23:00.000+05:30

A recent Business Week article (Tiny games for a giant market, June 23, 2006) about mobile games brought out some fairly obvious but interesting facts about the mobile gaming industry. The article estimated that mobile gaming could be an $18 billion business by 2010, exceeding ringtone and SMS revenues. While painting this optimistic picture, the article also highlighted some key obstacles the industry will have to overcome to meet these forecasts. A few thoughts on how game developers and publishers can use retailing models from the physical retail world to scale up exponentially:

- Games not appealing enough

While the Trip Hawkin’s (CEO, Digital Chocolate, a leading mobile game developer and publisher) and Larry Shapiro’s (VP,Walt Disney Internet Group) of the world go on about socially networked games and multi-player games as the future, the industry needs to step back a little and look at typical mobile game playing behavior . As the article mentions, casual games form a majority of the mobile gaming market. Clearly, the consumption behavior of mobile games lends itself to this. A majority of mobile game playing happens in 'time killer mode' – while waiting for a train, at the dentist, at an airport, etc. This means the game needs to be easy to learn and easy to play without requiring great skill or concentration. Therefore, game developers and publishers should focus on producing great “casual games” which have mass appeal instead of putting their effort on reproducing console games for the mobile or games with great special effects.

- Prices too high

The economics of downloading a game over the operator’s network means that game publishers have very little option but to price their games at $5 or higher. It is hard to imagine operators lowering their obscenely high share of content revenue in the foreseeable future (between 30% and 50%). This means that the onus is on game publishers, distributors and content retailers to drive down price points and make it more attractive to consumers to spend their money on mobile games.

One option is to use technologies that give consumers flexible pricing options like rentals for “n” plays of the game. So for example, a consumer with 15 minutes to kill at an airport may be willing to spend $1 for 3 plays of a game, but may find the $5 price point for outright purchase too high.

A second option is to use distribution options that bypass the operators network, thus allowing games to be retailed a much lower price points. These options include Bluetooth kiosks, PC based purchase and transfer to the phone, etc. However, the bigger publishers who are currently dependant on operator decks for a majority of their revenues may risk incurring the wrath of operators by pushing too hard on alternative distribution. Mitch Lasky’s (Electronic Arts) recent comments on going D2C and the subsequent “misquote” drama is sufficient proof. Interestingly, physical retailers all over the world are waking up to the possibility of retailing mobile content through their retail outlets and are keenly exploring options.

- Only 4% of mobile users purchase or download games.

Surveys show that while 50% of mobile users play games that are pre-loaded on their phone, but only 4% actually purchase and download games. While a number of factors may influence purchase behavior including data plan subscription, price sensitivity, etc, a tried and proven way of increasing purchase behavior is to offer free trials of games, in other words “try before you buy”. Try before you buy is not a new concept and has been around for at least a couple of years now and most game publishers and retailers acknowledge the success they’ve experienced. However, the problem game publishers face is in re-writing game code to enable try before you buy for their large catalogs (larger game publishers have 30,000 SKU's or more), across all the hundreds of devices and network and billing anomalies. The need of the day is a technology or tool that allows game publishers to enable try before you buy easily and distribute games in minimal time. Such tools already exist in the market and game publishers need to partner with technology companies and make investments if required to refine and develop these tools.

Here's to the $18 billion pie that's there for the taking..

Airtel's data plans are detrimental to growth of VAS

2006-06-20T12:39:00.000+05:30

As anybody who’s tried to download content over Airtel knows, the experience is frustrating enough to put you off content downloading for a long, long time. I have been an Airtel GPRS subscriber for nearly 2 years but have never been able to figure out the different types of GPRS schemes available to subscribers.

Now, lets see what an Airtel subscriber has to wade through in order to download content. The basic GPRS package on Airtel is called Airtel Live and gives you access only to Airtel’s portal or walled garden. There is no GPRS monthly rental or data charge to activate Airtel Live, but the user explicitly needs to request for Airtel Live activation. Airtel Live activation only allows access to the Airtel Live portal . However, the portal itself requires a subscription of Rs. 30 per month in order to download any ringtone, image or game. The Rs.30 subscription gives you ‘free’ content worth Rs30 and any further content downloads are charged per download. Typical ringtones are Rs7-10 and games retail at Rs50 –Rs100 per game.

Another package called Mobile Office, which I'm subscribed to, allows me to download mail from my office server and access any WAP/WEB site I want to. Mobile office subscription is Rs 600 per month for unlimited data access. Here's the extremely bizzare bit - despite being a Mobile office subscriber, I cannot download content from any 3rd party WAP site such as Yahoo! mobile of Indiatimes. I can access the sites but any attempt at downloading gives me a message that says "You are not authorized to download". Completely perplexed, I called Airtel only to find that I needed to subscribe to another data plan called Airtel Online, which would allow me to download content from 3rd party WAP sites for Rs 99 a month.

So now, I have 4 data access points I juggle around with depending on what I'm trying to do - Airtel Live, Airtel Online, Mobile Office and Airtel MMS. How on earth does Airtel expect a lay man to figure out any of this. I do not have any personal experience with Hutch, but I'm told there is just one standard data plan.

I wonder what Airtel's VAS team is thinking. If the idea is to drive traffic only to the Airtel Live portal, then they are being extremely short sighted and haven't learnt from operators world over who are moving away from the walled garden approach. The only other explanation I can think of is that they want to limit data usage until they invest in infrastructure to handle large scale data usage. Either way, one cann only hope that Airtel simplifies its data plans soon and benefits the entire industry by doing so.

Alternate distribution channels for Mobile VAS - necessary for India

2006-06-20T12:33:00.000+05:30

Despite all the brouhaha about the phenomenal mobile subscriber growth in India (100 million and counting), ARPU’s’ are falling steadily across all operators and non-SMS data revenues continue to be negligible; With operator strategies primarily driven by customer acquisition, falling voice plan rates and call charges are leading to lower ARPU.

Operators are all talking about increasing ARPU through mobile Value Added Services (VAS). Advertsising campaigns from operators are increasingly talking about content and services as differentiators. While SMS based infotainment services are growing rapidly (Kaun banega karorepathi alone generated more SMS traffic than any other interactive TV show in the world), the big ticket content downloads are yet to take off. Content downloads that do happen are largely mono ringtones that are delivered as part of the SMS payload and do not need GPRS connectivity. Reality is that GPRS penetration is abysmally low, at best around 2% in the major cities (Source: Netsize guide, 2006)

While everybody in the value chain, from operators to 3rd party service providers to content and media companies desperately want to drive mobile content revenue, there are 4 major factors that still impede mobile data revenues from crossing that point of inflection -

1.Complicated and confusing GPRS plans, atleast from the GSM operators, making it difficult for the lay person to configure their phone for GPRS
2.Lack of robust operator infrastructure which makes GPRS downloading an extremely frustrating experience.
3.Price sensitive consumers
4. Easy availability of pirated mobile content

Despite the roadblocks, I still believe that mobile VAS is a huge opportunity in India, not just in the long term, but also in the near term. Firstly, the large youth segment, is extremely mobile savvy, has a high penetration of data capable mobile phones, is hungry for entertainment and personalization and increasingly has disposable income. And here's the best part, its not just youth in Mumbai, Delhi or Bangalore who have high end phones, I have seen young people in small towns all over the country carrying the fanciest and latest phone models. Secondly, media and entertainment companies are driving direct to consumer VAS. They're spending the advertising rupees (hoardings, ad spots), they've tasted success with SMS services and are eager to see higher margin content downloads take off.

In the long term, media brands will influence operators to improve infrastructure and bandwidth and make sure that prices come down, both for data plans and content purchase. The interesting opportunity though is in the near term. How do you translate the opportunity that 100 million mobile subs present into money on the table today? The answer, as Dylan said , is blowin in the wind and probably lies in using "Alternate distribution channels" for mobile VAS.

This is not rocket science but simply making use of local knowledge and experience, combining it with some simple yet innovative technology solutions and packaging it all nicely for the user. The "Alternate distribution" winds are already blowing. Airtel has started music downloading service at Airtel retail stores across the country. The user experience is not great but its a start and can only get better and bigger as innovative companies partner with Airtel. A major retail chain (which I cannot name for confidentiality reasons) is already in talks with several service providers to set up point of sale mobile content kiosks which use bluetooth or some other technology to distribute content, coupons and promos at its retail stores all over India. These "Alternate distribution" chanells make use of footfalls and "trusted brand" image of major retailers, can drive down costs for the consumer by over 50% (no need for Operators network and billing charge) and also help to educate consumers about mobile VAS.

Moreover, these "branded stores" can establish themselves as bona fide mobile stores in the future, similar to web stores like amazon.com today. The physical store experience can be extended to the phone through WAP stores or device resident applications as the GPRS base in India improves and grows.

The bottom line is that "Alternate Distribution" of VAS in India appears to have tremendous potential and presents a great opportunity for any new innovative technology provider or service provider who can address the user expereince problems that physical retailers are trying to figure out.

Inflated mobile content numbers hide the true picture

2006-06-16T17:50:00.000+05:30

Business Standard, in an article on Jun 12 says India's Value Added Service (mobile content) market is expected to touch Rs 3,000-4,000 crore ($900 million) by 2007.

The 3000-4000 crore number is so ridiculously inflated that it borders on the amusing. In fact one of the biggest issues in the mobile data services landscape in India is lack of accurate reporting. There are plenty of anectdotal numbers floating around with Yahoo and a couple of operator portals claiming over a million downloads a month for mobile content. Anybody who cares to dig in will soon realize that facts and numbers just dont add up. GPRS penetration is less than 2%, the download experience is frustrating and inconsistent, operator data plans are complicated (Airtel’s Airtel Live, Airtel Online and Mobile office are confusing enough!) and operator walled gardens dont help either. The only form of mobile content doing well in India are probably mono ringtones which can be ordered easily and delivered as an SMS.
Operators need to wake up to reality and simplify data plans and tariffs, allowing media companies to drive the off-portal market. Otherwise, the kind of mobile content numbers being forecast are not going happen anytime soon.