These are excerpts from a paper, for IAMAI, Sumita Kale and Laveesh Bhandari, Indicus Analytics, New Delhi.

  The mobile handset has become an inalienable component of the average Indian household within a decade and a half of its introduction.  Mobiles would penetrate into the lowest economic segments in hinterlands and urban slums, among the old and the poor.  This is all now well accepted by most.  It is also generally accepted that the key factors behind the spread of the mobile handset have been (i) relevant services, (ii) consumer choice, (iii) network externalities, and (iv) low entry and usage costs at decent quality levels. 

Of these perhaps the last is the most important.  That has also been achieved due to a combination of technology availability and high competition levels, backed by a policy/regulatory regime that encouraged low price offerings to the masses, with minimal intervention in the market-place.  This, again as is well known, is a potent combination.  It has achieved what few economies have been able to achieve – a highly profitable and lowest cost mobile communications sector.   

This success has however been limited.  Value Added Services or VAS have not seen the same level of success as mobile telephony in India.  Countries such as China and Japan, as well as those in Europe have been far more fortunate where VAS usage and services are considered.  Each of these have varied competitive models. What differentiates them from India?  What aspects of the experiences of other countries that need to be better understood in the Indian context?  And finally, how can growth of the VAS market be catalyzed?    

This paper studies the Indian mobile VAS industry and identifies specific points of action.  It is likely that VAS market would grow large enough if given enough time; but that would be at a very slow pace.  The problem, the paper finds has to do not with a lack of demand, but a coordination failure between various players.  Once the problem is identified as that of a coordination failure, the solutions are straightforward – greater transparency across the value chain, easier entry at different points in the value chain, and enabling open competition that is un-fettered by over-regulation. 
Coordination Failure and VAS

The MVAS and voice services can broadly be seen as two different services being provided on the same platform.  This ‘platform’ comprises of telecom infrastructure put in place by the MSPs, and the software that enables the transfer of services and content on the hardware as well as the associated payment mechanisms.[1]  MVAS and voice are tied services being provided on the same platform.  This is one attribute of the MVAS industry that prevents competition from generating adequate amount of user benefits.[2]  In a sense therefore, the MSP has a monopoly over its consumer, and has an advantage on this aspect over a third party. For instance, the user can be contacted directly over the mobile by the MSP, but a third party will either need to pay the MSP for this, or will need to use some other media.   

In the case of MVAS, the consumer needs to send a request on a particular number or short code.  There are a limited number of short-codes and these are assigned by the MSPs (currently this is a 5 digit number).[3]  The onus of tying up with many different MSPs rests with the content provider.  Consequently a content provider may not be able to get the same number from each MSP.  The larger the number of MSPs, the larger the difficulty, effort and costs for the content provider.  This in turn affects the content providers’ ability to access a large number of potential users across different MSPs.  Moreover, since MSPs also provide MVAS services to the consumer, the incumbent (MSP) effectively controls the entry of potential competition (the pure content provder).

The MSP has information on the type of handset, usage patterns, as well as all consumer requests are routed through the MSPs platform.  Thus the MSP typically has better information than the content provider.  In other words, informational asymmetries further affect the smooth functioning of the industry.  The lack of credible reporting on usage by the MSPs negatively affects the expectations of content providers.  This in turn impacts their inclination to invest significant amounts for better MVAS content/services. 

Moreover, the aggregator or MSP provide a range of facilities to the MVAS content provider – the platform, marketing, short-code, etc.  Supply and demand equilibrium for each of these elements is therefore not seen in this market, and therefore independent price discovery is therefore not observed. 

The combination of the above factors generate market failure in the MVAS industry. Note that these factors operate in other countries as well, and are not typical to India.  But in the case of China, coordination was achieved due to state control and direction (albeit imperfectly), in the case of Japan this was due to the high market power enjoyed by DoCoMo.  In Europe, regulation is much more stringent.  In India on the other hand there are many more players, there is little industry coordination, and there is little regulatory oversight.   

The net result of the above is that only those MVAS content providers willing to supply low cost and generic content can profitably enter this space.  And consequently the poor quality-low scale and scope equilibrium is sustained.   

However, it is not that MSPs are inherently villainous entities.  They are responding to market conditions that favour such shortsighted action on their part.  The MVAS market would have automatically evolved if individual action towards greater transparency and revenue sharing was rewarded with greater profits in the short and long term.  But that is not likely to be the case.  If a single MSP were to provide greater revenue shares and transparency, he would lose on short term revenues and profits.  It would also not benefit from better content for the following reasons.  The incentive for a content provider to invest more to produce better quality content is higher, the greater the consumers he can access.  But if only a single MSP provides greater revenues, strong enough incentives are not generated. (The lower the share of the MSP the smaller the positive impact of ‘good’ action – in India the largest MSP has a market share of barely 23% and falling.)  For such an environment to be created we would require greater transparency and revenues across all MSPs in the industry.   

In other words, individual benevolent action is not likely to rewarded in this market.  This is a form of market failure that is characterized by coordination failure within the industry.  As a consequence all players in this market are affected negatively. 
The solution to the MVAS problem lies in the realm of ensuring greater competition in the space.  This can be achieved if the principles of transparency, flexibility, coordination, and fairness are adhered to.  If industry cannot through collective action create such an environment, then regulatory oversight becomes necessary to achieve these ends.   
[1] The hand-set owned/used by the consumer can be seen as the node on which the mobile platform delivers its content and services.
[2] If it were possible for the user to choose different service providers for MVAS and voice, both of which were sharing the same platform the scope for market failure would be reduced.  (Similar to choosing different providers for local and international dialling on the landline).  This may however not be technically feasible.
[3] In the future the need for a short code will reduce as WAP becomes more popular and the user can directly order through the WAP enabled site of the content provider.