OnMobile has a significant share of the mobile value-added services (VAS) industry and Arvind Rao has played a key role in taking it there. Rao has a very straightforward view of the mobile VAS industry and is certain that most 'issues' present in the industry are blown out of proportion. Tarana Khan caught up with him before OnMobile announced its plans to file for an IPO.

Q. Most people in the mobile industry think that the VAS explosion will take 18-24 months to reach its full potential. What is your view on this?

A. In what we call traditional VAS, person-to-person SMS was worth Rs 300 crore five years ago. Today, it is touching Rs 5,000 crore and it is growing by 50-70 per cent a year. That means, in another three years, its size will be larger than the advertising industry. I don't think we should think of VAS in a limited window – that it's going to grow and mature and then stabilise. The analogy I would use is: VAS is like what the Internet was. And if you look at the Internet, it is still growing after 10-12 years. The same thing will happen to VAS.

Secondly, I believe VAS will be larger than the Internet, particularly in countries like India. Because the phone is so ubiquitous in India and the growth of VAS is far in excess of developed markets. Everybody I have met, from Telefonica to Vodafone to AT&T, cannot believe the results we are achieving in India because it is way beyond what they are getting. The classic examples are caller tunes or ring back tones, which are big VAS products. Most of the Western operators who have this product have market adoption rates of less than 5 per cent. In India, the number is 20 per cent, and very soon, it will be 30 per cent. So, obviously, either their markets are fundamentally different from us – which I don't believe – or we are doing something different. I believe we are doing it far differently than they are and many of the lessons are replicable overseas. In fact, we are doing that and talking to overseas operators and very soon we will roll it out.

Q. Why do you think there's the perception that VAS is stuck in this rut of wallpapers and ringtones?

A. It's the classic thing about the elephant and the blind man and the deaf man. You will get different views. A content provider will look at it as ringtones and wallpapers because that's all they care about. We look at it more holistically because we are a facilitator. We have SMS, voice, WAP, on-device portals... we do everything end-to-end. That's on the technical side. On the product side, we are not a content producer, we aggregate. For example, the music industry. People who have a big market share here may not have the same share in digital. It's much easier for an individual artist to participate. We have a system which is web-based, where individual artists upload their tunes directly from the website and from there, we convert them into ringtones and do the digital distribution and pay them the royalty. We are seeing a lot of this. I mean, we have artists in Goa and Siliguri and it's doing extremely well on digital. You would never be able to do that in a physical format.

Q. But why do you think advertisers are unsure of VAS as a platform?

A. The first thing is, once you open up the mobile medium, the sheer inventory is huge. Forget about SMS and WAP, I am talking about voice, for example. There are 700-800 million impressions a day, right in the ear. So, you have high contact, high salience and high awareness building. And if you unleash that sort of inventory on the ad industry, one of two things is going to happen. Either the rates are going to crash across the board, or advertisers will not really understand the medium and look at it the wrong way. Today, advertisers have a budget and they get advised by some agency and they say, 'We are going to put in 5 per cent in digital'. I think that's the easy way out. It's myopic. It's easy, but it doesn't achieve the long term objectives. And I am happy to say that clients, like HUL, are quite clued in and are willing to experiment. They are waiting for this medium to open up. But a lot of traditional people want to look at it on a percentage basis. And I think they will miss out on the value of the medium.

Somebody asked me, what is the size of the industry? I don't know. But I wouldn't be surprised if five years from now, mobile was less than a third of the ad industry. That means that a substantial share will go away from TV and print.

Q. What about the Internet?

A. The Internet would co-exist. It has certain attributes, in terms of rich graphics and interactivity, which you will never have on the mobile. So, the Internet will also be a significant part. The only problem with the Internet is the penetration. That's going to take a long time.

The other thing is that the mobile has something unique about it. It's literally mobile. Right now, this is the only vehicle for delivering an ad to me. Secondly, the MIS (market information system) available on mobile is light years' ahead of any other medium. TAM is based on 6,000 households -- how representative can that be? On mobile, you can get actual sample sizes of millions in one shot. So, it's a completely different order of magnitude from TAM. For example, when we run a campaign on mobile, on the next day, you can give a detailed MIS to the client, saying who heard it, were they in a metro, what is the usage profile? The amount of data that operators have is huge and we work very closely with them. So, we know the consumers well.

Q. We still have a number of unresolved issues in the industry. There are bandwidth issues, and that operators are dominating the industry. I mean, in an ideal environment, content providers should have a larger share. How do you think this can be resolved?

A. There will always be limitations. The standard thing people keep saying is that when 3G comes, the world's problems will be solved. That's rubbish! Things like hunger and poverty are not going to go away with 3G or 6G! Technologically, you will be beyond the curve. That being said, we have actually innovated to a point where, in VAS, we are ahead of many developed countries, even with their 3G networks. So, I think that's a myth. We are on 2G and 2.5G networks and we have been able to achieve higher results. So, I am not worried about that.

Q. But everybody states it like an excuse for video or radio not taking off on mobile. It seems like everybody is waiting for 3G to happen.

A. For the last five years, we have not been waiting. And none of our operator clients have been waiting either. If I look at all the people we are working with – and we are working with all the big guys – all of them have grown revenues from VAS at least 70-80 per cent a year for the last five years. That's not bad. The people who are waiting for it are small players, such as location based services. That's like taking a potshot. If I am running a business, I am not going to take a potshot at something in the hope that it happens. You have to do whatever you have to do to make it work.

The second issue you raised is also something which keeps coming up in forums – in the gripe about content versus operators. I am not a content owner, so I don't have that axe to grind. From a cost standpoint, how do you think about what the revenue share should be?

Q. They are largely looking at the Western model, where content owners have a 50-70 per cent share.

A. That is true more or less. But what happens over there is the promotion of those services is left to the content owner. The trick in VAS is actually who has the muscle power to promote? I have seen big brands on mobile not achieving one-tenth the traction that an operator promoted service has. Because an operator has the muscle power to promote. That's all that counts. You can say what you want. Even if you get 70 per cent share, it's not going to help.

The second thing is, for many content owners, this is a supplementary channel. So, you are making money through music cassettes and CDs, and then you get on the mobile platform. So, if you justify the pricing on that on an incremental cost basis, they should be paid what they are being paid today. People forget the cost of building a telecom network, of acquiring subscribers in a very competitive market. Every day, something happens. If TRAI says that roaming rates should be zero, then Rs 600 crore of revenue is gone just like that. They have to come up with something. They have invested billions of dollars on the network. So, for them, it's about survival, but for content owners, it is about incremental revenue. On a marginal cost basis, they are making huge profits. I think it's a very fair deal right now. And it's a scale game. Today, in the VAS industry, there are about 150 companies and I believe that the right number should not be more than 10 or 15. So, it is grossly overpopulated and over-funded to some extent, and I think there's going to be huge consolidation. There has to be.

Q. Don't you think that to scale up, operators will need more content? Right now they are selling ringtones in majority, but when will we see the next level of services?

A. We are seeing that user-generated content and interactive content – which is non-content based – is picking up rapidly. It's also a question of pricing. On one hand, if you raise the prices of ringtones and wallpapers, will demand fall? Sure. So, the share today is because it is being pushed heavily. Any service which is pushed will become successful. We have got a lot of services like dating and find-a-friend and voice chat, which are doing extremely well and which have zero content.

Q. But are they popular only in urban markets?

A. Actually, the usage of WAP is higher outside urban areas. Maybe it's because people don't have the same opportunity cost. In cities, you have television and radio, and you don't have time for it anyway.

Q. Do you think mobile content providers need some sort of incentive to help them grow? Maybe in the form of a larger revenue share?

A. I believe that if you have the brains and you want to innovate, you should go ahead and do it. The revenue has nothing to do with it. Frankly, the revenue share is used as an excuse by people who are non-innovative, have me-too products, and want to sit back and make money off the operators.

In fact, we are actually going to start funding small companies to come up with content because we have a fairly good idea of what will work, but we don’t want to be in the content space. We are thinking about that internally.

Q. What are the services you think will be the next level?

A. In the next 12 months, you will see the launch of some big mobile advertising services. It's not just advertising, but advertising linked to m-commerce. So, it will be interactive and will take the customer to fulfillment. That's going to be rolled out with a couple of operators.

Q. You are working on a platform?

A. Yes, we have already done it. We are on trial.

Q. And how will it work?

A. It's going to work through SMS, WAP and voice, and the Net. And the platform which we are designing actually in Phase 1, will be through the inputs of clients and their agencies. In Phase 2, which we will roll out in six months, we are going to provide a web interface just like Google where any local merchant can put up an ad. The rate card is there and you can pay through your credit card. And in 24 hours, you have the report.

Q. Will it be implemented throughout India?

A. Yes, it will be live all over India in about six months.

Q. Could you give me an example of how it will work, in an Indian context?

A. Today, you have these Hello Tunes, where you hear songs when you call someone. The subscription rates on that is about 15-25 per cent of the subscriber base. So, the balance is still splintering. One of the programmes we are rolling out is to give people some incentive like free SMS or ringtones in order to allow that tune to be replaced with an ad, which will match the calling party's profile. So, if you know this person has listened to a cricket score, you play him a Nike ad. So, there's quite a bit of matching.

We don't want the mobile medium to go the way of SMS and the Internet. What happened with SMS and the Internet was that the profiling done was very low and agencies and advertisers picked on them as a mass medium with a cost per impression and rates went to zero. Here, what we are counselling operators is that it is better not to sell the inventory if you don't have the profiling for it. Don't sell it cheap. Because we know we can get it right. Don't launch with some introductory prices because that is very difficult to recover. We met some people in agencies and explained to them that the day we launch, the rates will be fixed because I can only give so much profile information on a caller. Within six months, we will add interactivity wherein the person hearing the ad can press a button and be connected directly to the call centre and receive the offer on SMS or WAP on their phone.

Q. What sort of returns do you expect from this in terms of ROI?

A. On our sample base, we are hitting returns in the range of 20-25 per cent, which is mind blowing! Now, is that sustainable at huge volumes? Maybe not. But it is very unlikely that we will not get 5-10 per cent response rates. The reason why it is currently 2-3 per cent in the industry is that you are spraying so much, you don’t know where to hit. Since we know where to hit, we are using the inventory more intelligently. I would rather that the inventory not be used than be misused. The phone is a very personal device. Nobody likes getting unwanted calls. So, if you spray too much, there is a consumer backlash and they initiate action to prevent that.

Q. And it's already in place...

A. It's in place and I think it's very justified. On the other hand, if you can make the connection with a person who is in the market to buy a television, with a TV ad, that is value on both sides. That's the type of matching we are doing on our platform.

Q. And how big is your subscriber database?

A. The number is roughly about 120 million.

Q. Another issue that is raised is that the mobile is not viewed as an Internet device.

A. Yes, except for Reliance Communications, where I have seen a lot of people using it. If we take the number of GPRS subscribers at 15 per cent, then the number of people who have used it at least once is probably half, or 7 per cent, and the number of people who actively use it is one-tenth of that. There are two reasons for this. One is the lack of market education and the second is that networks have to be upgraded. It's not always on like in Japan. Most people think the meter is ticking when they switch it on.

Q. Again, there is no fixed price structure for GPRS use and people have to pay for downloads per kb, which is very primitive.

A. I think all that is going to change because the pricing on GPRS today is incomprehensible. I can’t figure it out and most people can’t. I think it should be based on flat subscription fees for unlimited use, short of downloading movies. Many of these products go through a phase of being launched by technical people.

Q. So, is it true that operators are not really paying attention to mobile Internet?

A. No. no. They are. GPRS is definitely growing much faster than SMS, because the base is small, and even ahead of voice.

Q. But are they actually leveraging that growth in terms of content?

A. They are trying. There are three things: network speed, penetration of high-end handsets and user education. They will take some time. Operators today are putting their budgets where they can get maximum returns because they are under tremendous revenue pressure.

Q. Do you have any products in mobile search? What do you think are the prospects of mobile search?

A. Yes, we have a music search service where you can say part of a song name and the system finds it for you. We are also working on mobile search, which we will be rolling out in the next six months. I believe search will not be as large on mobile as it is on the Internet, except for local and very impulse-driven search. There are also limitations on screen size. If you want to buy a digital camera, you may search for an hour on the Internet. You won’t do that on the mobile. It's unlikely that high value products will be searched on the Net. It's going to be small items.

Q. OnMobile as a company has always been strong in voice products? Do you see it doing very well in India?

A. Absolutely. I can’t see 70-80 per cent of our population using WAP. At least 40 per cent of our population doesn't know how to read and write. Unless you provide them with some tool to interpret language to text. Even if you have a 3G network, you are still going to talk into the phone.

Q. Do you think it will do better than text messaging?

A. If you take out P2P SMS and compare it with person-to-system SMS like short codes, voice would probably be twice the size of text.

Q. How well do you think vernacular languages are going to do on mobile?

A. Voice is already available in 10 languages. This was done two years ago. We have also launched vernacular WAP in five languages, and are launching in more. So, the WAP market will also take vernacular all the way through.

Q. And what are these WAP sites?

A. They are available on Idea, Hutch and Airtel. They are not heavily promoted because GPRS use is low. But I think the pendulum will shift and there will be more allocation in the next 12-18 months.

Q. A number of online publishers have started getting on to mobile. What do you think of that trend? Will it be good for the industry?

A. I think it will be very good. It's a good debate because while they have the big budgets, look at history... all these guys have failed going into another medium. Yahoo! Mobile has been around for a long time, but what traction has it got? Google also has achieved nothing. Every time a traditional player tried to enter the mobile space, they have not done well. They have not understood the medium. They try to apply the same business models to the other medium. We consider ourselves mobile specialists. We have taken a lot of clients live, including Star, AOL and Disney.

Q. What are your expansion plans for OnMobile, with the IPO plans?

A. We have a two-pronged strategy. Clearly, India is a large market for us and will remain that. We are going to continue rolling out new products. The second strategy is international expansion. We have launched in several markets overseas starting from Asia – Australia, Indonesia, Pakistan, Bangladesh. We are launching in more and are looking at some acquisitions as well.