SMS: It is a Strategic Weapon
It is unquestionably better on GSM than on CDMA. Not promoting this ARPU-booster aggressively can be GSM operators’ biggest mistake
Shyamanuja Das
Monday, February 17, 2003
Even before the recent round of price slashes, India’s mobile voice tariff was one of the lowest in the world. With not-so-high usage and low tariffs, the average revenue per user (ARPU) for voice services for all operators has been not so encouraging. And with this round of announcements, the GSM operators have explicitly conceded that no matter what they do, the maximum airtime revenue per user that they can get is Rs 1,700 or so. With that kind of highest yield, it is not impractical to assume that the maximum ARPU that they can hope for is not more than Rs 600–700. And that is postpaid ARPU. Prepaid would be even lesser.
That is certainly not a figure that can keep them in business for long. And the operators are not foolish enough not to know that. Reliance’s entry may have forced them to go for these ‘rock-bottom’ airtime plans, but what has probably given them the courage to do so is a hope—a hope about the future. A hope that they will be compensated for the revenues lost in voice by new revenues from data services. And any differentiation that would happen in data services—one hope that they are sharing with all their big brothers in Europe. Only the level of expectation is different.
Almost all major Indian GSM operators have launched their GPRS services. With just one real application, multimedia messaging services (MMS), some of them are going out of their way to create hype about it. While Idea has been marketing the peer-to-peer multimedia messaging aggressively, Hutch has promised its GPRS customers action video clips from cricket matches during the ongoing World Cup Cricket tournament in South Africa. When we talked to different operators for this story on SMS, many of them were more keen on showcasing (even to a specialized business magazine like Voice&Data) the fancier aspects of MMS. The thought obviously is while SMS is doing well and will grow, what will really take up their margins is newer services built on GPRS. MMS is just the first in the line—the first step towards a distant oasis.
Or Mirage?
They could be committing a big mistake. Unlike other markets like Europe and parts of Asia-Pacific, Indian GSM operators will not only have to fight against each other but also have to contend with the challenge of CDMA. They themselves plead before the policy makers and regulators that CDMA is a big threat and will eat into their market. And the fear is not entirely unfounded. According to a survey that VOICE&DATA carried out during September–October 2002 among the GSM users in India, as many as 22 percent said they might completely shift to CDMA-based WLL. And a predominant 52 percent said they would seriously consider shifting to CDMA, though they were not too sure.
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SMS Application Distribution—Escotel
n
Downloads (primarily ringtones)
n
Railway enquiry
n
Chat
n
Messenger/e-mail
n
Cricket—varies depending on India matches
Revenue Break-up: September 2002*
Cricket 43.12
Chat 14.14
Railways 12.41
Downloads 7.1
Horoscope 5.98
Jokes 4.15
News 4.47
Contest 2.14
Others 6.49
*When ICC Champions’ Trophy was on
Source: Cellnext
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A lot has changed since then. Reliance has actually launched the service and GSM operators have stood up to the challenge by offering lower tariffs. Also, subsequent changes in tariff regime mean that CDMA would not be as cheaper. And thanks to changed tariffs, GSM is cheaper than what it used to be. In terms of price, it is a more even game now. So it may not be compelling for GSM users to change purely for cost reasons.
That being the case, the battle is more likely to be fought over the actual offering.
So what should the players do? Of course, offer their best foot forward.
For CDMA 1x, that best foot could be delivering multimedia applications over handsets, in which it is not just superior to GPRS but also widely tested, thanks to the nature of market demand in Korea and Japan. No wonder, the direct selling agents of Reliance show you scenes from Deewar and Kabhie Khushie Kabhie Gham (or NDTV news or sports actions, if you like) to draw the attention, projecting that as the USP of CDMA. Reliance has taken a conscious decision to project the multimedia capability. And is doing that more zealously of late, with new tariff regime making the CDMA a little costlier.
And so are the GSM operators—trying to project the multimedia communication on GPRS. And that’s a dangerous game that they are playing. Why?
First, GPRS (and even WCDMA) cannot match CDMA 1x in terms of delivering real video. Many senior technology professionals within the cellular industry do admit that, albeit privately.
Two, by projecting GPRS based services, they are asking the users to change their handsets. With cost of service acquisition being so low, the cost of change for GSM users to CDMA is the cost of handset. By asking them to change their old handsets for a new GPRS handset, GSM operators are asking them to make fresh investment anyway. That is a great leveler. If one has to make that fresh investment in any case, one could well consider changing to CDMA. While users will have the advantage of keeping the same number if they change to GPRS, they will get handsets at a cheaper price if they go for CDMA. Reliance has subsidized the handset, and Tata Indicom is offering financing. The GSM operators are yet to come out with any concrete subsidy/financing plan for new handsets.
And finally, GSM operators’ approach to content creation has, at best, been halfhearted. In the multimedia generation, a large part of the messaging will be application driven. Without enough content, it may just fail completely, after some initial fancy. In fact, some of their trusted content providers for SMS, are now developing multimedia applications for Reliance and are betting more on that.
In short, by projecting MMS more than they should, GSM operators are taking the fight to a turf, where they are weaker compared to the competition.
True, they have put a lot of money in deploying GPRS infrastructure. True, they need to inform everyone that they too have the capability to offer video. But that does not justify going all out to promote multimedia application, which could well result in shifting the entire market attention to that application. That is what companies like Reliance would love to see. In other words, GSM operators may end up playing into the hands of the competition.
And this, despite the fact that GSM operators have a potential battle-winner that could serve as their best foot. Just that they have not promoted it the way they should have.
You guessed it... it’s the plain old text messaging, SMS—a service that has attained a near cult status. So much so that national newsmagazines have done cover stories on it. According to Merril Lynch, SMS could bring in as much as $75.6 million of revenues for Indian GSM operators by the year 2005.
But more important than these facts and figures, incidentally, is the fact that text messaging is CDMA’s weakest spot. Not only did SMS start much later in the US, where CDMA originated, the track record of text messaging in both Korea and the US has not been so good. According to Jupiter Research, less than 40 percent of the US mobile users use SMS, as compared to 75 percent in the UK and Norway. What is more, the US users send less than five SMS per month, as compared to 34 in UK and 56 in Norway. Even in a newer market like India, more than 70 percent of users do use SMS, according to a Voice&Data research done in ten major cities across India. Without exception, the use of text messaging in the GSM world has been much higher than in the CDMA world.
Statistics and track records apart, there is a compelling reason for GSM operators to promote SMS. Today, peer-to-peer text messaging accounts for 90 percent of the total messages that are sent. While that percentage will fall, as an alternative to voice, peer-to-peer will always occupy a dominant share of the total messaging pie. And for that, a critical mass of user base is a must. As incumbents, GSM operators do enjoy that advantage of having more than 10 million users on their networks. It’s not easy for CDMA operators to match that number so easily.
In fact, many GSM users among the professionals we spoke to, have the same question about switching to CDMA—if I cannot send SMS to a GSM user, what is the point? And that number (and more importantly, their average bill value) is significant.
And of course, last and least (least, because regulations do keep changing), the regulator has clearly said that WLL CDMA operators won’t be allowed to offer text messaging services.
All this means that GSM operators should take SMS much more seriously than they are doing at present. While MMS may well be the future, SMS is here to stay. It is simple, popular, proven, and as we will discuss, powerful too. This bird in hand is certainly much better than many in the bush.
Much of the apathy towards SMS is because of its perceived positioning so far—as a low-margin, high volume offering. While margins are still comparable with voice—sometimes even better—beyond a point, SMS cannot be stretched to provide a significant boost to the ARPU, goes the conventional thinking.
The traditional mindblock against playing up SMS too much has its reasons. SMS uses the signaling channel and hence an exponential growth in SMS usage in a network means that the network will get choked even when the spectrum is available for voice calls. In other words, a sharp decline in the perceived network quality. No operator wants that.
As a matter of fact, that is true. SMS has the capability to ‘choke’ the networks. The only problem with this argument against promoting SMS is that it makes an implicit assumption that the revenue from SMS can be only a factor of the number of SMS sent on that network.
That probably was true a few years ago. Today, that’s a fallacy.
The operators’ revenue strategy built around SMS should try to strike a balance between the volume of SMS and the average yield per SMS. Operators who have a higher yield per SMS are the ones who can make SMS a winning formula.
Over to Applications
Theoretically, there are two ways to increase the average yield per SMS.
First is simple—increase SMS tariff. The only problem, it will not work in a competitive and price-sensitive market like India.
The second is enhancing the value of an SMS—beyond just messaging. In other words, it means consciously trying to change the mix of SMS pie to include more application driven messaging for which an operator can earn a premium.
If you thought that’s unachievable, here is some good news from Merril Lynch. According to the investment and research company, by the end of 2003, close to 700 billion application-driven SMS would be sent from mobile phones, which would be almost half of the total SMS traffic. During 2000–2003, while peer-to-peer messaging has been growing at a CAGR of 46 percent, the application-driven SMS traffic has been growing by a whopping 204 percent during the same period. Of late, the trend has been visible in India too. According to Escotel, whose territory does not include any of the big cities, as much as 25–30 percent of the total SMS sent on its network is application driven. Idea in Delhi claims a similar figure. These figures, however, vary from month to month, with the cricket season, for example, taking the average up.
Needed: A More Proactive Approach
Offering applications on SMS is not rocket science. It requires a two-pronged strategy—building a robust portfolio of applications (services) and marketing them aggressively.
Building a portfolio of services requires solid content partnerships. In markets like Japan, where operators like NTT DoCoMo primarily make their money from data transferred, the operator keeps a small share of the total money that a user pays for content. In SMS, that model cannot hold good in India beyond a point, because of two reasons. The operators cannot increase the SMS traffic in the network profitably beyond a point, and two, they themselves have been making losses and struggling. While the exact share of revenue is a sensitive issue and saw a lot of debate in one of the discussion forums that VOICE&DATA had organized, it would probably suffice to say that building a market for good content is the onus of operators, not just for today’s needs, but also for tomorrow’s, when content would, as the much repeated cliche goes, be King. And they can do so by distinguishing between good content and average content and deciding the revenue share based on that, rather than being dictated by the negotiating power of the content provider.
Some of the operators have done a good job of building a good content offering. But none of them—with the exception of Escotel in one of its circles, UP (West)—has marketed the services. Advertising for mobile services in India is still targeted at hooking up subscribers. It is high time the SMS-based value-added services were marketed aggressively by GSM operators.
Will Users Pay?
Building services and marketing them will certainly help in some way. But will the users pay? That is the question.
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Top SMS-based Applications
Applications
Percentage
c
Information Services (all) 47.5
c
Downloads 32..5
c
SMS Chat 24.4
c
Messenger 23.8
c
Mobile Banking 10
c
Source: VOICE&DATA survey in four metros, Bangalore, Ahmedabad, Hyderabad, Pune,
c
What Information?
c
Information
Percentage
c
Cricket 73.5
c
News 48.7
c
Movies 15.4
c
Astrology 15.3
c
Stocks 8.1
c
c
Thiruvananthapuram, and Chandigarh
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And a tough one at that to answer.
The answer from industry experts is mixed. The user response to the ringtone and picture downloads offered by Hutch, Escotel and some others in association with Yahoo!, has been encouraging. However, the interest level is already declining, despite continuous update of new ringtones of latest Bollywood movies. The services have also become costlier. Today, it costs Rs 7 (including SMS charge) to download a ringtone from Yahoo!, while AirTel offers it for free to its subscribers (charging only for the SMS). However, the choice and quality of ringtones is better in Yahoo! Some users are still paying the premium for that extra value. Also, useful but low-volume services like Railways enquiry, and ticket booking at movie theaters can be put in the premium category and be charged at higher rates.
But there is a limit to that. Beyond a point, users won’t pay more.
For the operators, the solution lies in a two-step exploration of solution to that problem.
The first is: will someone else pay for those services to users?
The second: is there an alternate source of revenues?
These questions have been answered by some of the markets in Europe.
So far, in most of the markets, the revenue models for premium services have been direct—users pay for what they use. However, in markets like UK and Germany, operators are discovering that the age-old revenue model on which the print medium exists—the indirect revenue or advertising—is also a good revenue model, though again, the revenue is divided among a set of stakeholders, the operator being just one of them.
There have been major debates on whether users would like to receive advertisements on a very personal device like the mobile phones. The market, while still exploring the answer, has found that some of the marketing campaigns based on permission from users—permission marketing or opt-ins—have been quite successful, especially when marketing to the youth, and especially for entertainment and lifestyle products. SkyGo, a mobile marketing agency, conducted a study in the US, most sensitive place as far as individual privacy is concerned, in January 2001 to measure the effectiveness of mobile phone as an ad delivery medium and found encouraging results. Though this was done on WAP, since then, many including Cadbury’s, Smash Hits magazine, Nestle, and Sony Pictures have created successful marketing campaigns. UK has at lease a dozen of pure-play mobile marketing agencies and all of them have done considerable work.
Once this model gets established, many of the marketing campaigns can be bundled with valuable content to the user where the advertiser pays for the service. For example, the alert-based services for cricket score or election results can be paid for by an advertiser, whose ad is bundled with that content. Escotel has launched such a scheme for the ongoing world cup. For other opt-in kind of campaigns, Star TV and some movie banners have tried them, with encouraging results.
The answer to the second question is more direct. Is there an alternative source of revenues? The simple answer is—the enterprises. In other words, the B2B model. Unlike marketing campaigns, this is not a debatable issue. The productivity gains for many companies is very tangible. And quite a few companies are already doing that.
Typically, it involves the mobile operator getting its money from an enterprise, whose employees/channel partners/customers are the subscribers of the operator. These could be sales force automation, customer interaction, or supply chain applications that can be accessed by the mobile workforce/customers from their cellphones.
For GSM operators, whose users are already used to this simple yet powerful service, the job is cut out. Build a bouquet of service on SMS, market and incentivise application driven usage, and look for alternate sources and innovations.
While GPRS will take some time to be popular, thanks to the handset barrier, SMS is already here and earning good revenues for operators. And that also is CDMA’s weakest link. Isn’t good marketing all about showing your best face and exposing the opponent’s weakest spot?
Shyamanuja Das |
