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| Global Roaming | | OnMobile?s alliances with Vodafone and Telefonica will give it access to over 30 overseas markets and open many more |
| Shobhana Subramanian / Mumbai Aug 04, 2009, 00:09 IST |
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Arvind Rao recalls the time in early-2002 when OnMobile, the company that he had founded with friend Mouli Raman two years before, almost shut shop. The two had met when Rao worked for a private equity fund and was negotiating for a venture with Raman at Infosys Technologies. They clicked and decided to float a business together. But now things looked bad.
Then private equity fund Argo Global Capital, which had helped set up OnMobile in the first place, stepped in and helped the company back on its feet with some $3 million (around Rs 15 crore now). OnMobile not only survived but went on to become the best-known player in the non-SMS mobile value-added services (VAS) space in the country with a market share of around 30 per cent.
Seven years later, in what could prove to be a game-changing move, OnMobile has been engaged by two of the world’s biggest telecom service operators to work with them. Last month, the Bangalore-headquartered firm clinched a deal with the $58-billion Spanish operator Telefonica, the third largest telecom service operator in the world in terms of subscribers. OnMobile will roll out services for Telefonica’s customers across 13 Latin American markets. Earlier, in April, it was the $58-billion Vodafone, the world’s largest wireless operator with operations in 25 markets, which signed on OnMobile for emerging markets. For some services, OnMobile will be the exclusive supplier to both Telefonica and Vodafone.
These are revenue-sharing deals in which OnMobile will take home anywhere between 15 per cent and 35 per cent of the spoils. It will roll out services such as ring back tones and voice portals from its portfolio of nearly three dozen products. Says Rao, “There were several times during the negotiations when we felt we may not be able to close the deals but we believe we’ve managed to get good terms.”
Scale at a stroke
Rao’s looking at business growth of 30 to 40 per cent for the next three to four years. Which means, OnMobile will more than double its turnover by 2012 from Rs 400 crore now. With two big alliances under its belt, OnMobile can now play in a much bigger space — a market that’s probably 100 per cent larger than what it caters to today. Not that it’s a stranger to overseas markets — it has already teamed up with local operators in countries such as Indonesia, Malaysia, Australia and Pakistan. In fact, international operations already bring in about a fourth of its revenues. But the partnerships with Vodafone and Telefonica will allow OnMobile to access nearly 30 to 35 markets at one go.
“The advantage of the block deals that we’ve entered into is that rather than going country by country, we can access several countries together,” says Rao. Of course, nothing stops OnMobile from partnering more than one operator in a country (though some services to Vodafone and Telefonica may be exclusive). The marquee clients that it has just won should make it easier for OnMobile to pitch for more deals overseas. This is important because breaking in to new markets and hooking up with operators can be time-consuming. As Shubham Majumder, who spearheads telecom, media and technology research at Macquarie Securities, points out, “The international sale and commissioning cycle can be as long as nine to 12 months. So, it could typically take a VAS provider nine to 12 months to commission services for an international telecom operator.” The key reason Majumder cites for the prolonged sale and commission cycle is the limited time period in a year when operators implement any significant change in their IT networks. “The prolonged cycle itself poses an entry barrier,” he explains.
There’s money to be made
Rao says he’s worked out a schedule by which operations will be kicked off in three to four countries every quarter. So it will be a while before the benefits of these rollouts start flowing in. But there’s little doubt that that it’s a huge opportunity.
Look at the possibilities now open to OnMobile. Telefonica’s LatAm revenues for 2009 are pegged at $18 billion, while the forecast for Vodafone’s revenues from emerging markets (ex-India) in 2009-10 is in the region of $17 billion. The Indian wireless market, meanwhile, is tipped to see revenues of $24 billion by March 2010. Whew! “These markets have a fast-growing subscriber base and therefore the scope for VAS revenues is huge. Within VAS, the non-SMS piece, which is what OnMobile caters for, is growing even faster than the SMS segment,” says Ascentius Consulting Principal Analyst Alok Shende.
In LatAm, a high-growth market, VAS revenues account for roughly 10 per cent of the total wireless space; within this, SMS commands the bigger share of 6-7 per cent, while the remaining 3-4 per cent comes from services such as ring back tones and voice portals. That’s a market of $540-720 million for OnMobile.
And these services are its bread and butter, fetching it 75 per cent of its revenues. Ring back tones are widely used, particularly in Asia, where they make up a large proportion of the business in the non-downloadable content market.
And, as Srinivas Rao, who tracks the telecom space at Deutsche Securities, observes, the share of VAS revenues is only growing. In Brazil, for instance, the share of VAS revenues is expected to increase from 4 per cent to 16 per cent in the next five years. OnMobile’s share of revenues at between 15 per cent and 35 per cent, therefore, seems fair. After all, it’s the operator who bears the network expenses as also the branding, promotion and content costs, while OnMobile takes care of the hardware, software and managed services bill. And, at the end of the day, it’s the operator who owns the customers.
Execution is the key
Despite the fact that that two of the world’s three largest telecom service operators have reposed their faith in his company, OnMobile’s Rao is circumspect: “While overseas markets aren’t new to us, we will be operating in some new markets and although these companies are there to support us, we’re supposed to do the thinking and the analysis. Also, we need to prove that we can implement on a much bigger scale; so, there is some element of execution risk.”
Where he thinks OnMobile has an edge is in its proven technology and the fact that it has worked with Indian telecom service operators who work on a larger scale than players in smaller countries. That’s something industry watchers endorse. Says Macquarie’s Majumder: “OnMobile’s deep relationship with operators helps it to quickly introduce new products. In the process, it differentiates itself from the competition. From the service provider’s perspective, changing the VAS provider for an existing service implies a high dislocation of business. They would need to modify their back-end systems which they would be less inclined to do, given the complexities.”
According to Shende, another advantage OnMobile has is that it is familiar with a price-sensitive market like India — subscribers in most Asian and African markets are also price-conscious. “So the company will be able to manage its costs well and, of course, the more it sells, the lower will be the per-unit cost which is important because this will turn into a volume game.”
De-risking the business model
Indeed that’s what industry watchers believe will happen in the home market too. With prices likely to trend down, much like it has happened in the voice segment, and elasticity coming into play, it’s volumes that will drive growth. Without doubt, the VAS market should continue to grow at a fast clip, driven by the country’s rapidly-rising subscriber base, already at 420 million at the end of June and additions averaging 8 million a month.
However, Rao feels that with an increasingly high share of new subscribers located in the rural markets, it’s possible there may not be enough purchasing power in those areas to drive non-SMS VAS revenues as fast as has been expected. “The market will grow to Rs 16,000 crore but how quickly it will grow is the question,” says he. That’s why OnMobile couldn’t have better timed it’s alliances with Vodafone and Telefonica to venture quickly into new geographies. Although its revenues grew at a compounded annual rate of 86 per cent between 2005 and 2008 to Rs 262 crore and are estimated to cross Rs 400 crore for 2008-09, the Indian market is becoming competitive.
Slugging it out in the highly fragmented space are half a dozen large players, among them Bharti Telesoft, an outfit owned by Bharti Airtel, and OnMobile. A detailed break-up of the market is hard to come by but the share of non-SMS VAS, estimated currently between 5 and 6 per cent of the total wireless market, is tipped to grow to about 10 per cent by March 2012, resulting in a market size of close to Rs 15,000 crore from just about Rs 5,000-6,000 crore currently. With clients like Vodafone Essar, Vodafone’s 67-per cent subsidiary in India, OnMobile has managed to grow its market share to around 30 per cent.
The product advantage
OnMobile has a wide product range, the most popular of which are the caller ring back tones and voice portals which are virtually OnMobile’s bread and butter. According to Deutsche Securities’ Rao, Ad-RBT (advertising ring back tone), which allows for an advertisement to be played instead of a ring tone, could be the next big product to drive OnMobile’s revenues. “We believe this will open up mobile phones as a new advertising platform, offering a level of customer-targeting that is unmatched, given that there are 420 million mobile subscribers compared with 100 million television households. Ad-RBT is one of the services that will be provided to Telefonica exclusively in some markets.” OnMobile is all set to roll out this service with Vodafone.
Some time ago, OnMobile added phone back-up services to its portfolio following the acquisition of the European VAS operator, Vox Mobili; the acquisition also gave it a foothold in the European market. Phone back-up services are expected to be launched in India shortly with Bharti Airtel, Vodafone and state-owned BSNL, and these could be popular in other emerging markets too, say analysts. The scale achieved with each of these products could catapult OnMobile to the next league. And scale could help. Traditionally, mobile VAS companies haven’t had too much bargaining power with service operators because they weren’t big enough; however, larger the scale, the more efficient is the execution and therefore the harder it becomes for an operator to match the cost of delivery.
For the people
For all this to happen, says Rao, who worked for many years with consulting firm McKinsey before moving on to a couple of private equity funds, it’s critical to have the right people in the right place. To inspire employees and ensure that attrition is low, the company does not only hand out ESOPs but also rewards them with responsibility and tries to create the right work environment. “We did create a lot of employee wealth when we listed the company in February 2008 — we created 140 millionaires. But what’s more important than the money is the self-esteem that our people have.” However, the management’s equally clear that it can’t be carrying passengers and lays out well-defined targets that need to be met. In spite of fast growth, there are no free lunches.
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