I was at Wharton recently, and Knowledge@Wharton set up a “Five Questions” discussion between Kevin Werbach and me. Here is what part of the exchange went.

Kevin Werbach: I’m very interested in learning from you more about the market in India, where you have been active. Could you talk about how the Internet market and the communications market in India are different from the United States or other countries in the West?

Rajesh Jain: The market in India is dominated by mobile. For mobile we have 400 million-plus users. Internet has been more stagnant in the last year or year and a half at about 45 million to 50 million. So what’s happening is that, unlike many other markets, mobile is becoming the dominant device for voice, for value-added services, and increasingly for mobile Internet also. It’s somewhat similar to what we saw in Japan in 1999 where, because of the limitation of broadband and computing, basically i-mode, the service which DoCoMo launched, became the center of people’s lives. Mobile is already becoming that. There’s a whole host of services being created around mobile, but there are two challenges with both.

The challenge with Internet is that there is not enough usage, and that has limited the growth in Internet advertising. The Internet-ad spend in India is about $140 million, which is about 3% of the overall media spend in India, but it’s still quite small. Mobile on the other hand, the value-added-services part, where if you look at non-voice and non-P2P SMS, that’s about a billion dollars. So you have a situation where the consumer spending is roughly seven times that of what businesses are spending. From an entrepreneurial perspective, you see these are two separate opportunities.

So while you create services you will be limited by Internet advertising, which is not growing. Google is getting a larger share of the pie and so on. In the mobile space, the problem becomes the mobile operator. Operators want a larger cut of end-user pays. You’ve got to give billing to the operator. There has to be some innovation, which needs to happen in one or both of these segments. That’s the lay of the land when it comes to India.

Werbach: How do you see that changing? Or do you see that changing? You talked about Japan, and in Japan certainly i-mode was fairly dominant, and still mobile Web services are big there. But also DSL and fiber became very significant.

Jain: In India there are two changes I see happening if I look at the Internet space and the mobile space. In India, on the Internet what we will see happening is the emergence of really mobile broadband. I was talking to one of the telecom providers recently and they have these USB modems, which are basically wireless modems on USB. Typically they’ve been used with laptops – people on the move, enterprise users. Interestingly, when I talked with them they said, “Look, the biggest demand we are getting for these USB modems – because they are high-speed, they are 3G speeds – is from consumers to connect their home PC, the fixed PCs, to the Internet.” Because in many places it is hard to get connectivity. The speeds are just not good. So even though people are willing to pay, the connectivity is pathetic for the most part. So that can drive the growth of the Internet. And devices, low-cost devices, which really are network computers. So we have to solve both the connectivity problem and the device problem for the Internet to grow in India. And then, of course, once that grows, more users start happening. Automatically the ad spends will increase. But that’s the change which needs to happen.

The mobile side is even more interesting. What’s required on the mobile side is to create an ordinate ecosystem for value-added services to the operator. So it’s not really happened, because companies tend to prefer to work with the operator, and once you start working with the operator it’s very difficult to break that relationship.

Two things have happened. The entity DoCoMo showed the potential for an open marketplace where they had tens of thousands of applications which got created, and that drove users. They went from zero to 30 million in about three years, in 1999 to 2002. Apple has shown what’s possible in the U.S. with a model which is basically independent – the App Store model – which is independent of the mobile operator. That is the opportunity which exists today to create what I call a digital-services operator, where there are four elements one needs to put together in the mobile space: alternate payments of collecting money independent of the operator, which Apple is doing in the U.S. through credit cards built up largely first through the iTunes music they sell. The second is having a large reach, so you can reach tens of millions of people cost-effectively so you can make them aware of the services. The third is an open publishing platform and marketplace, so third-party providers, content providers, service providers can comment. And finally, an initial set of compelling services, which get people to want to go create the account.

If these four elements can be put together there is a great opportunity to transform the mobile space and break the stranglehold that mobile operators have. What’s happening today is that, because of their focus primarily on voice and in India mainly launches in rural areas, the top of the pyramid – which is about 100 million people, 25% of the base – want new services but are not able to get to the operators.

So there’s an interesting opportunity which can be created in India and then made to work outside.

Werbach: But how does that happen given the level of control that the operators have, because presumably the operators will resist that change?

Jain: The key thing is to start with two better channels on the mobile, which are in a way almost open. So SMS and voice, because most phones are not using and don’t have data plans in India. But SMS and voice work on all phones. And now if you can create push SMS-based services, which make it almost agnostic. You can make it agnostic of your unit. Businesses are using it to send SMS’s and at very low price points compared to P2P pricing. These prices tend to be much lower because you are buying SMS capacity in bulk. And the incremental cost of sending an SMS through any network globally is close to zero. So there is an interesting thing now where you can create the equivalent of an SMS app store and a voice app store. This is the thing which Apple has basically not done today. They have focused on content so they are limited in a way to only the people who are buying their phones. But an SMS app store could fill what I call life’s free moments. You can create lots of services. Can we create a series of, say, 30 packs of SMS’s, where you can educate people on innovation? You send them an SMS at a fixed time every day and it comes with a link so you get a key idea, which you can read in 15 seconds. And then there’s a link where you can explore for maybe three of four paragraphs, 45 seconds to a minute.

Because it is coming to people and it is permission-based, it opens up a whole new world. On the mobile, people are willing to pay for everything they get. So this starts creating an alternate channel. Now because it’s SMS and push-based, and because it’s voice where you’re dialing up and calling up a voice portal like an IVR system and then listening to stuff, there is no way operators can block any of these things, especially if you have your own payment-collection mechanism. You can make these services-priced. You get all the elements required to start offering services direct to the users without having to rely on all the operators. You need one or two friendly operators for you to push your SMS’s in the system and be able to offer you the voice capabilities. But you can do that in many markets – in most markets – because you always have someone who is willing to compete with the other operators in that market.

Werbach: But at some point, even if you can prove out that model on SMS and voice, presumably there is demand for the smartphone type of applications.

Jain: Absolutely.

Werbach: Especially as you get to 3G and 4G and higher capacity.

Jain: Absolutely. So start with what works today. Again, to go back to the Apple analogy, they started with music. Now they’ve gone into apps and videos and ringtones and all that stuff. Today, in India, SMS subscriptions and voice orders are $350 million to $400 million. That’s money being spent by consumers where the actual content providers and service providers are getting less than 20% of their money. Everyone is looking for a way to monetize mobile users because people have realized that you can’t build a business on the Internet relying only on advertising. It’s got to be consumer-based, and consumers are paying. The question is, “How do you get a fair share or a significant share of the pie to then let you promote the service, to be able to then reinvest back into creating new content?”

The rest of that ecosystem needs to fall into place. But what’s missing is the platform, which basically allows for service discovery, for money collection, for a cash balance to be created. So you make it prepaid – because in India we don’t have too many credit card users – to do exactly what the mobile operators have done. Get people to create a small cash balance so you’re paying $2, putting money into your account. And then as you use the services the money starts being credited. It’s a model they are very familiar with. So the payment model they’re familiar with, content they’re already using, and now because if we don’t have the operator’s share, which is in many cases predatory, you can offer services at very compelling price points, maybe a third of the price points at which today they are being offered in the market. If you can start putting this, I think you’ll see an explosion on the SMS voice site. You have the accounts being created, and then you grow with the market. So then as 3G comes in you can offer video, you can offer apps, and you can offer content downloads, all of that. But start with where things are today and which can work on every phone without the dependency on data plans and high-speed networks.

Werbach: How do you envision things going forward? Is there going to be a global market ultimately of app store providers? Or will this continue to be very much localized depending on the characteristics of the market?

Jain: Very interesting. What we are seeing now is two kinds of apps stores being created, by the handset makers – so like Nokia, Apple – and now already some operators are starting to think of their own app stores. The Vodafones, Verizons and others are probably all thinking of app stores.

I think in both cases what the app stores are doing is being offered to a limited set of users. So in the case of iPhone and Nokia, it is people who bought those phones. People tend to change their phones once in two years. What happens then to your apps and the services you subscribe to? What happens if you change operators? There’s an opportunity to create operator- and handset-agnostic app stores. So essentially take some of the good ideas of the Internet, the open access, etc., make it available on the mobile with one big difference. Have people create a payment or subscription relationship. In retrospect you see that’s something which was missing on the Internet. If operators basically do billing for, say, 10% or 15%, they could get a piece of the pie also. But if they insist on keeping 50% or so of what end users pay, it will create an opportunity for neutral, third-party marketplaces to get created who can create their own case balance and who can offer services which are independent of any of the handset guys or handset companies or the operators. That’s one.

Second, everyone’s focus has been on smartphones and the apps. But what everyone forgets is that in markets like India, 95% of the market doesn’t use such phones. Even in the U.S., 70% of the market does not use it. We’re only going to stay that way for some time. There’s a window of opportunity at least for the next two years. So if you can get in there today – in say the next few months – start building relationships with them, start getting them comfortable with the SMS, voice and, today, services app store, which is independent of your dependency on which service provider you’re using or which handset company you’re using.

That is going to be the real opportunity, which can start in a few countries. But it can actually be global. Theoretically there is nothing that we are doing in India which can’t be offered to any other mobile user anywhere in the world. So that is the big opportunity to monetize mobile users directly independent of the specific operators or the handset companies they have.