Telling Arvind Rao that the 70:30 split doesn’t make sense is like waving a red rag to a bull. The revenue split between telecom operators, aggregators/technology providers and content firms in the value-added services (VAS) food chain has long been a bone of contention. In the rest of the world, the split is 30:70 in favour of the content owners. In India, of the Rs 4,700 crore that VAS generated in 2008, more than 70 per cent came from music (This Rs 4,700 crore does not include regular SMSs used for communication). Of this, only 10-15 per cent, depending on the deals, went to the content owners or music labels — 15-20 per cent went to aggregators (Hungama or PPL) and technology providers like OnMobile. It has led to a lot of ill will between the telecom companies and the content owners. With their large subscriber bases and control over billing, telcos are Goliaths in this battle with hundreds of small music companies forming a sea of Davids. As the CEO of the country’s largest technology service provider for VAS services, Rao stands right in the middle of the fight. The Rs 406 crore OnMobile is the VAS back-end for almost every major telcom operator in India — it was this year’s winner of the Business Standard Star SME award. Rao deals with the content firms (T-Series or Saregama), the content aggregators and the telecom operators. He justifies the 70:30 split to Vanita Kohli-Khandekar, emphasising that these are his personal views and not those of OnMobile. Excerpts:
Do you think the 70:30 revenue share split is fair?
You have to look at what the rates are in the light of the prevailing market conditions and cost structures required to deliver the services. If you look at indexed trends in telecom rates, on people-to-people (P2P) voice from 2002 to 2010, it would have fallen from 100 to around three, in SMS this would have fallen from from 100 to eight (these are representative figures to illustrate my point). Meanwhile, the prices of VAS services have remained constant in nominal terms, whether on Internal Voice Recording Service (IVRS) or Ring Back Tones (RBT) or most other VAS services. VAS technology-enabler companies like OnMobile have seen their revenue share (indexed) drop from 100 to around 30. This is a negotiated, discounted share. Over the same time, royalty rates demanded by music companies would have grown from 100 to 300. (RBT forms about 70 per cent of the VAS revenues in India). There has to be parity in trends across all members of the ecosystem.
The direct costs required to deploy the VAS services and the incremental costs of selling RBTs for music companies are near zero for content aggregators and royalty bodies. It is mostly the cost of invoicing and collection. The telcos need to put backhaul infrastructure and software in place and promote the services. We need to develop, test and deploy specialised high-scale, redundant software; have huge banks of hardware servers; have a sales and marketing and operations team in place. We handle over 10 billion calls a month. We need to track every call, every song, every activation, every deactivation.
So there are huge direct costs associated with selling RBTs. Of these, less than 1-2 per cent lie with content owners, content aggregators and royalty collection bodies. Therefore, when you think of revenue distribution, it has to be equitable taking these facts into consideration.
What about the argument that content owners in developed VAS markets such as Japan, Europe, Korea get 60-70 per cent revenue share?
That is because in Europe the operator says, “Fine, I will give you connectivity, you do everything else including promoting your content.” The model is fundamentally flawed, that is why RBTs are not so successful in those markets and everyone suffers. Here the operator promotes the content. It is a different model altogether, not a different royalty rate!
But VAS is hugely successful in those markets...
I am only talking of RBTs. Maybe there are other services that have worked. You could try giving the content owners in India 70 per cent of the revenues and tell them to promote it — I would bet that it won’t work as well as it does today. There are two questions here. One, what is the correct equitable percentage — is it 30 per cent or is it something else? Two, how is it distributed?
What does that mean?
The whole ecosystem of producing music, from the lyricist to the composer, the musician, the music director... — everyone shares in the gains.
Isn’t there a need for a royalty-collecting body or an aggregator in a market as fragmented as India?
Yes, there is. But it should be one entity and one entity alone; regulated as a monopoly; run in a transparent manner and on a not-for-profit basis. (Currently, royalties are collected and distributed either by the arms of music companies themselves or by Phonographic Performance Ltd.) Rates and market share data should be transparent, open for all to see, and data should be shared publicly via online systems.
Do the telcos and companies like yours suffer from arrogance — you are a large, organised industry and you deal with a much smaller, fragmented one?
Telcos don’t underestimate the fact that everyone has to make money. But there has to be a rational argument. For example, Airtel can claim to content partners that it is three times the size of the next guy, so it should get a better rate and scale discounts. But in VAS, the rate has nothing to do with size or other considerations, everyone pays around the same rate. There is an undue effort to turn that 30 per cent into 50 per cent, rather than reducing rates in a cost-sensitive market like India and growing the whole base.
What I see is a culture clash. Telcom is a high-scale, high entry barrier, transparent, IT-driven industry. Media, on the other hand, is different. VAS is a product born out of the convergence of the two. The question is whose culture will dominate the business born in this new converged area.
Why is the VAS growth trajectory in India different from the one in other markets (music sells more in India)?
Music works in other markets too. You can see that from the growth of iTunes and iPod. But RBTs haven’t taken off for two reasons.
One, the technology they use there is inferior. In India, telcos use local solutions to sell more VAS. For instance, the application that says “Press * to copy this song” has led to 35-40 per cent of new subscribers coming in. Another example is micro-billing. In emerging markets, most of the users are prepaid. If they want an RBT and find that they have only Rs 10 balance, they don’t buy. So, we have offered a solution that will charge say only Rs 5 for one week of usage.
Two, the business model they use is wrong. They just buy a box and put it in their network. But this (technology solutions for VAS) is not a shrink wrapped service. We have a team of 50-100 people on each (telco) account. Many of them sit inside the telco and try and figure out how to push usage or make it easier. When you are on a revenue share, you have to contribute to make the service successful.