VCs in VAS

Value-added services attract VCs to telcos
24 Dec 2007, 0051 hrs IST, Shalini Singh,TNN

NEW DELHI: India's runaway success in mobile telephony has contributed to value-added services (VAS) for mobile and Internet emerging as the biggest investment focus for venture capitalists, with investments expected to double to $500 million this year.

India is now among the top three markets for mobile and Internet VAS along with the US and China, says Alok Mittal, MD (India), Canaan Partners. With 185 million mobile subscribers, India lags just US and China, with its subscriber base projected to grow to a staggering 500 million by 2011.

Of a clutch of 30 or 40 VCs firms, at least 10 to 12 are active in the Internet and mobile VAS space, with total investments projected to double to $500 million in 2007-08 from $250 million in 2006-07, says Mittal. Of this, $50 million is committed by Canaan Partners, an early stage global investor with $2.4 billion capital under management.

In mobile VAS, VC interest is focused on firms creating SMS and data VAS with revenues of $5 million to $15 million. VC valuations in these firms are typically four-five times the revenue, as demonstrated growth is 100% year-on-year, says Mittal.

Data from telecom and software consulting firm Ovum, shows that in 2006, VAS contributed 15.7% of worldwide mobile operator revenues of $671 billion. This grew to 16.2% of revenues of $738 billion in 2007 and is projected to hit 18.5% of $880 billion in 2010.

In India, VAS accounted for 13% of total operator revenues of $13 billion in 2006, grew to 13% of 19 billion in 2007 and is projected to hit 14% of total projected mobile operator revenues of 33 billion in 2010.

Growth of VAS can only be impressive going forward, considering the trends displayed in China's mobile market. A case study by next generation services firm, Telenity shows China Mobile's average daily SMS volume to be close to one billion, with strong non-SMS data business growth.

What's more, VAS revenue rose to 23.5% of total revenue in 2006, with almost 50% subscriber growth from rural areas. According to Buongiorno, an enabler of digital mobile entertainment, global VAS digital entertainment market is expected to hit $50 billion by 2010, with about 840 million users using cell phones as media players.

Internet is witnessing a 20-25% rise in user base and 50-100% increase in revenues depending on the business, every year, globally and in India too. The downside is that India's Internet subscriber base remains much lower than mobile. However, Mittal says travel and online jobs display promise. While market size is below $100 million, compared to $5 billion in the US, annual growth rates are robust at 80%.

VAS applications include business productivity (work force management), entertainment, messaging and collaboration and lastly, location and presence. Entertainment encompasses movies, sports, astrology, ring-back tones, music, video, TV, chat and content.