A Perfect Storm for Mobile Operators (Part 5)

There are three things mobile operators can do to make VAS a larger component of their revenues and an even greater percentage of their profits.

First, break down the walled garden and open up access to third party content and service providers. Combine this with an offer to do microbilling for them and pay them 60% or more of what the end users pay the operator for the service. This will spur innovation and drive new services the likes of which digital India has not seen before.

Second, think of the mobile and PC as a continuum. The mobile itself has many limitations which are unlikely to go away anytime soon. The two biggest ones are the size of the screen (in comparison to a PC) and the speed of the data pipe (as compared to wireline). So, drive services that transcend both the screens, filling up life’s free and know-now moments on the mobile, and providing an unmatched rich experience on the computer with its big screen and thick pipe.

Finally, drive the creation of connected wireless devices and services with control of the end-to-end experience. Think eReaders for education, connected gaming consoles, netbooks that work on mobile broadband, and more. These are all services that can generate Rs 200 or more in data ARPU each month. This is also where operators can differentiate themselves.

I hope that at least one of the operators thinks along these lines in 2010. Indian customers are happy with cheaper services, but they will be even happier when the mobile phone can become a magic lamp in their lives. Therein lies happiness and profits for the embattled breed of Indian mobile operators.

A Perfect Storm for Mobile Operators (Part 4)

Mobile operators in India have long focused on voice services and new customer acquisition. I have long argued that this strategy has severe limitations since voice pricing can and has to be matched by everyone else. Thus, all it does is give one a fleeting advantage in the marketplace, and that too, for the lower part of the subscriber pyramid.

The real value lies in the 100 million subscriber base at the top of the pyramid. These subscribers want more than just voice. Their data needs have not been fully addressed by the operator portals and VAS services. The result is that VAS in India is still at 10% of revenue, with half of that being accounted by P2P SMS.

In other emerging markets (Latin America, China), VAS is at over 20%. If India can double the contribution of VAS, it can add another Rs 10,000 cr to the operators, with very high margins. This can offset the declining revenues from voice and SMS.

This is easier said than done. Operators, historically, have focused on the voice component. Making the shift to thinking non-voice and data is not going to be easy. In my view, the ones who can make this transition are the ones who will emerge stronger from the ongoing and coming battles.

So, what steps can the Indian mobile operators take?

Continued tomorrow.

A Perfect Storm for Mobile Operators (Part 3)

Stock prices of the listed mobile operators have halved in recent times. This couldn’t have happened at a worse time.

Coming up in January are the 3G and Broadband wireless access (BWA) auctions. With rules and dates having been changed frequently over the past 15 months, it does look like we will finally have the auction with the playing field firmly in favour of the incumbents and loaded against new entrants.

But, given that India has almost a dozen operators and just four slots for 3G, it is possible that there could be aggressive bidding in some circles. Operators want the licence not as much for the data potential but for the additional spectrum which will allow them to expand their voice services more cost-effectively.

With a depressed stock price and a government looking to fill its coffers to meet social spending targets, the future for the market leaders does appear to be challenging. They have to win at all cost. There are more of them than the available slots. So, someone will have to lose. And prices could go high. There probably won’t be much joy in victory given the capital needs that the 3G rollout will cost.

Amidst all this, the CBI is investigating the allocation of the 2G spectrum to a favoured section of operators, and the matter is also in the courts. So, uncertainty over the past still prevails.

So, what next?

Continued tomorrow.

A Perfect Storm for Mobile Operators (Part 2)

Sometime in the next few months, Mobile Number Portability will be introduced. For a mere Rs 19, a subscriber can switch operators and retain their mobile number. This will shift the battleground to the high ARPU customers, who are much more reluctant to shift to the cheapest plans.The subscriber growth and cheap voice calls have further increased congestion in many parts of India. Call drops are quite frequent – and have been so for some time. To be fair to operators, they are working with a fraction of the spectrum that they really need given the subscriber numbers.

(On a separate note, the government policy of allocating additional spectrum based on subscriber milestones skews the focus for operators to adding subscribers at all cost. As some operators have demonstrated, these are numbers which can easily be fudged. All of this for the ultimate prize – scarce spectrum.)

We are also now seeing the launch of the newer operators, who got their 2G licences under questionable circumstances. The only weapon they have in their arsenal for subscriber acquisition is – no surprise, cheaper voice.

All of this has hit India’s leading and oldest mobile operators hard.

Continued tomorrow.

A Perfect Storm for Mobile Operators

Wikipedia defines “perfect storm” as “an event where a rare combination of circumstances will aggravate a situation drastically.” That is exactly what has happened to India’s mobile operators. Let’s look at what has happened, and then we will look ahead to see what to expect.

It all started with Tata Docomo using pay per second as its entry strategy into the GSM market a few months ago. As the lower part of the pyramid started shifting to it, the incumbents realized that they had little choice but to replicate that. About 20% or so of a telco’s voice revenues are derived from the rounding off of the billing to the nearest (higher) minute.

Next came the cut in roaming rates by 50-60%. Reliance then took the battle to SMS charges launching 1p SMS. In between, came the news of about 20% of users in India having multiple SIMs, which effectively enables them to switch operators.

Voice accounts for 90% of a mobile operator’s revenue, with SMS adding another 5%. The remainder comes under “value-added services” (VAS), with about 40% of that comprising of caller ringback tones (CRBT). From hearsay, even the CRBT absolute subscriber base has stagnated or has been dropping in the past months.

And there’s more to come.

Continued tomorrow.

Blog Past: TIME Magazine on IndiaWorld

Time magazine featured the IndiaWorld sale as part of a cover story on the Internet in February 2000. Here is an abstract:

The first two years were spent convincing advertisers that an online company had genuine potential. “In a small business, there is no such thing as a small mistake,” he says. “We always knew our first mistake could well be our last one.” With its healthy online traffic, IndiaWorld has evolved into one of the most extensive general sites for information about India, though its profit last year was an imperceptible $5,800. But a buzz had developed, and Jain was courted by “angel” investors, foreign venture capitalists and banks eager to lend. In the end, he went with the Hyderabad-based Satyam Infoway, deciding he had “maximum comfort levels” dealing with an Indian buyer.

Weekend Reading

This week’s links:

  • IDC 2010 Predictions: from New York Times. “Apple brings out an iPad digital tablet. Netbooks move upscale. And IBM buys Juniper Networks.”
  • The Economics of Social Gaming: by Jeremy Liew. Why they are so attractive to investors.
  • The Fall and Rise of Media: by David Carr (NYT). “For every kid that I bump into who is wandering the media industry looking for an entrance that closed some time ago, I come across another who is a bundle of ideas, energy and technological mastery.”
  • What Enterprise 2.0 really means: by Andrew McAfee. “Social media tools will make companies more efficient but they won’t replace business functions.”
  • Wired on Avatar: The 3D movie is James Cameroon’s next.

IndiaWorld Sale: The Essence

Today, as I look back to the same period a decade ago, it seems like it was a different era –  and a different me! I ask myself at times whether I was smart or just lucky. Perhaps, a combination of both – one has to be smart to be in the right place at the right time to be lucky.

As I wrote a few years ago:

In the end, when I made the decision to sell IndiaWorld in November 1999, it was not an easy one. I had not created the business with an intention to cash out. For five years, IndiaWorld was the only life I ever had. But as I spoke to a few close friends, two things become clear. In business, it is important to know not just when to enter, but also when to exit. Also, by nature, my strength lay in taking new ideas and building new businesses, rather than sustaining existing ones. With this in mind, I decided to sell.

I don’t know if I will have another success as big as IndiaWorld. I do hope it will happen. But for me, more than that, entrepreneurship has always been about going out there, imagining things that no one has tried to do, and trying to build those. And in these efforts, failure is a more probable outcome than success. But that should not stop one from trying and thinking big.

These words of Dan Bricklin are for what life as an entrepreneur is all about:

Being a successful entrepreneur is tricky. You have to live with having control and not having control at the same time. It’s like this: In big business, when you need to cross a river, you simply design a bridge, build it, and march right across.

But in a small venture, you must climb the rocks. You don’t know where each step will take you, but you do know the general direction you are moving in. If you make a mistake, you get wet. If your calculations are wrong, you have to inch your way back to safety and find a different route.

And, as you jump from rock to slippery rock, you have to like the feeling.

IndiaWorld Sale: Valuation Question

Even today, I get questions on the valuation. I have a 2-part answer.

First, there was another suitor for IndiaWorld, so it was a competitive bidding situation.

Second, look at what happened to Sify stock the day the deal took place. It rose about $700 million on the day after the announcement of the acquisition. In fact, the stock began a meteoric rise that saw Satyam Infoway’s valuation touch almost $10 billion in the next few months as it did a follow-on stock offering on Nasdaq.

One has to put that era in context. It was a time when it was a race against time to build web businesses and money was available in plenty for first-movers. IndiaWorld was the leader in the Internet space in the Indian context. And that is what helped us (and later, Satyam Infoway).

Of course, starting in late 2000, there was a re-rating of everthing dotcom. And Satyam Infoway too experienced a downturn in its stck price. But it had raised enough capital to go about building its business through the next few years.

Tomorrow: The Essence

IndiaWorld Sale: Quotes

Here are some quotes from the press release that was issued on November 29, 1999:

Ramaraj (Managing Director, Satyam Infoway) said that “IndiaWorld is a perfect fit for Satyam Infoway. Satyam Online is already a very popular portal in India with focus on purposeful browsing. In e-commerce the new joint venture with Bank of Madura is focussed on providing financial services and e-commerce to Indian interest audience overseas.” “IndiaWorld with its dominant audience overseas would provide that perfect first to make Satyam the portal of choice for India,” he said.

Rajesh Jain, managing director, India World, said: “India World, a pioneer with over four years of history, has secured a unique position with overseas Indians. Satyam Infoway has created a portal business with a strong focus on audience within India. The combined portal would be an undisputed leader in providing content and services over the Internet to India interest audiences globally.”

Hemendra Kothari, chairman of DSP Merrill Lynch, who advised India World on the transaction, said “This transaction represents a win-win situation for both parties. While being the largest transaction of its kind from India, I am particularly pleased that it heralds the recognition of Internet entrepreneurship in India, similar to the huge phenomenon witnessed in the Silicon Valley. We are happy to have played a role in combining two complementary business models into what we believe would be the leading portal of India.”

Tomorrow: Valuation Question

IndiaWorld Sale: The Announcement

Here is an abstract from an Indian Express article of that date (November 29-30, 1999):

In one of the largest deals in the Indian corporate sector, internet firm Satyam Infoway Ltd said on Monday it has bought a 24.5 per cent stake in IndiaWorld Communications Pvt Ltd for $28 million (around Rs 121.50 crore).

In addition, Satyam has also acquired an option to purchase the remaining 75.5 per cent of the outstanding shares of IndiaWorld at any time prior to June 30, 2000 for an exercise price of $87 million (Rs 377.50 crore).

Once Satyam buys out the entire 100 per cent stake, the acquisition will cost around Rs 499 crore (around $ 115 million), making it the largest takeover in the booming Indian information technology sector.

IndiaWorld website registered an aggregate of 13 million page views in October 1999, most of them coming from outside India, the statement said.

IndiaWorld’s websites, very popular with overseas Indians (NRIs) worldwide, include www.samachar.com (covering India related news), www.khel.com (dedicated to covering cricket), www.khoj.Com (the premier Indian search engine), www.bawarchi.com (providing more than 3000 Indian recipes) and various other sites focussing on niche areas of interest to overseas Indians.

Tomorrow: Quotes