After consolidation in the telecom allowed mobile service providers to increase call rates, telecom companies attempted to muscle in on the OTT (over the top) market. OTT refers to applications like WhatsApp, Skype, and Viber that offer messaging and calling services that ride on the telecom backbone. Most of these services do not charge customers-who only pay data charges to the telecom provider. Telecom service providers argued with Telecom Regulatory Authority of India (TRAI) that they were losing an estimated ₹50bn in revenues from losses arising out of free services offered over the internet.
TRAI, perhaps one of India's most consumer-friendly regulator, decided that increase in data revenues on account of OTT services more than compensated for “losses” from use of free messaging. The proposal to charge OTT services has, for now, been killed.
OTT services-dazzling growth, vaulting valuations
The OTT market has witnessed a lot of excitement of late. In Feb 2014, Facebook purchased WhatsApp for $19bn. For a company with 56 employees and roughly $20mn in revenues, valuations seemed outlandish. At the time of purchase, WhatsApp had 480 million users of whom 70% were active daily, and were “on a clear path to have a billion people using its product”. Mark Zukerberg, CEO, Facebook, commented: “It's the only widely used app we've ever seen that has a higher rate of engagement than Facebook itself.”
Importantly, in India, Brazil and Mexico-large potential markets for Facebook-a survey revealed that respondents were 12x to 64x more likely to use WhatsApp compared to Facebook. In addition, WhatsApp adds a million users a day and already carries over 18bn messages daily-more than the entire global telecom industry.
Zukerberg's reason for paying top dollar can simply be put down to an attempt to stay relevant in a fast changing world. In addition, by swapping one paper for another ($16bn was in the form of a share swap), Facebook was using its own expensive shares as “currency” to pay for another expensive acquisition.
Emerging business models
Like in many other internet businesses, WhatsApp revenue model remains a challenge. WhatsApp promises advertising-free services. Its only revenue is “subscription” of $0.99 per year per user after 1 year of free service. If it were assumed that users would not migrate to other service providers when charged, a 500m user base could generate revenues of $495mn for the company. Most users do not currently pay for the services.
High valuations and local conditions have incentivised local versions of messengers. “Hike” an Indian version, recently raised $14mn-large for a startup but small change when compared to competition. The app reports 15m registered users. India has about 240mn internet users of which 185mn are connected through their mobile phones. Another 10mn come online almost every month - with cell phones still as the major contributor. That still leave over 1 billion people without an internet connection.
Hike has partnered with Vodafone, Bharti and Idea Cellular and offers free SMS to those who are not on Hike. With over 930 mn cell phone users, this could change dramatically the population using Hike. Despite this, WhatsApp with 40mn active users (not only registered) in India is far ahead of the game. Hike's current business model seems to be to generate enough excitement and users to make itself attractive for a takeover.
Innovation-need for private enterprise
The landscape for communication has changed dramatically once the sector was opened up for the private sector. Department of telecom struggled with trying to make phones available to rural, even urban areas. The entry of private players heralded innovations like “pre-paid” making mobile communication accessible and extremely cheap.
The next big opportunity for telecom players is likely to come from focus of the government on “financial inclusion”. A major part of the reason why financial services are not available to rural India is because of the dominant need of RBI to micro-design the engagement framework-similar to the DoT days in telecom. In this context, recent efforts to create “limited purpose banks” are to be welcomed. As in other countries, it is likely that mobile companies will become leaders in payment services in remote parts of the country. The expected morphing of telecom players into payment banks and consequent impact on their earnings bears watching. Equally, heightened competition in banking services will also mean that hitherto protected banks may need to work harder to defend their turf.
The development of a “digital India” as promised by the government will create enormous opportunities for Indian entrepreneurs. Besides obvious cases like Flipkart, new businesses are brewing in the digital space. For example, creation of digital exchanges for “online media buying” has created a space for analytics, consultancy and brokerage. A new exciting world is opening up for next generation innovators as India opens up to the internet, especially over the mobile. Hopefully the government will restrict itself to making the “road” while leaving “cars” to be created by innovators.
Anand Tandon is an independent analyst
This column appeared in the September 2014 issue of Wealth Insight.
This article was originally published on October 24, 2014.
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