A new Breed of Media Companies Emerges from the Shadows of Telcos

A new breed of media companies emerges from the shadows of telcos, changing the highstakes game of content distribution. Zenga is an unusual television channel. Its prime time runs between 11:00 am and 2 pm instead of 8 to 11 pm like most other TV channels in India. That is because Zenga is a mobile TV operator that offers 100 channels such as Aaj Tak, MTV and Colors. Over the past two years, it has acquired about seven million unique users who spend an average of 12 minutes on the channel. The Rs 75crore Zenga TV is ad-supported. So you don't need to pay your mobile operator to use it. Zenga is not just a successful Mobiletv company. It symbolises the churn happening in the Rs 10,000 crore market for mobile entertainment. Competition, a lop-sided revenue split and a host of other factors (discussed later) is pushing aggregatorsthe back-end guys who bring you the content, the technology, the payment systems and the advertsto look for other business models. Some, such as Zenga, are finding it more profitable to be in control of their products, while others are finding it more lucrative to go overseas. Roughly half of IMIMobile's Rs 500 crore revenues in March 2011 came from the international market. Hungama now calls itself a publishing, development and distribution company for digital content. "Aggregation is only 10 per cent of what we do," says CEO, Neeraj Roy. Aggregators are morphing from vendors into what Roy calls, "new media companies." WHAT IS THE FUSS ABOUT? * A Rs 10,000 crore mobile entertainment market with three main players: Telcos, aggregators and content firms * Telcos walk away with 60-70 per cent of the revenues * Too many aggregators; falling margins have pushed them to look elsewhere * Some are making money overseas, others by bonding with the consumer directly, or by creating new products and services * In the process, aggregatorsHungama and Zengaare now becoming media companies in their own right * This raises questions on the telcos ability to straddle the world of media and mobile telephony The shiftfrom telco-delivered entertainment services to aggregator brand dominated onesis not just about where we buy our ringtones and TV from. It is also about who will be the gatekeepers to the avalanche of digital media and entertainment in the years aheadwill it be a telecom operator or will it be an aggregator turned media company?

The Story so Far

"The big gorilla in the game is the operator," says Raj Singh, managing director,2ergo India. It was the spread of mobile telephony on the back of which ringtones, caller tones, wallpapers or clips among other media services started selling like hot cakes on phones. Thanks to the aggressive

marketing of telcos as well as their ability to bill and collect money, the market for mobile data services doubled between 2007 and 2010. This happened, however, with a structural flaw. Of the Rs 10,000 crore in VAS revenues, just about 5-15 per cent goes to companies that own the copyright over say a song or a film clip. Anywhere between 15-20 per cent goes to the aggregators. The rest, between 60-80 per cent is retained by telcos. This is the exact reverse of what happens in Europe and Japan where content companies get a bulk of the revenues. This is because a chunk of India's 873 million mobile subscribers are carved out between half a dozen major telecom firms. On the other hand, media is an extremely fragmented business, with hundreds of small shops making films, music or television shows. The telco, then, is the guy with the upper hand. Harit Nagpal headed marketing for Vodafone globally before he became the CEO of Tata-Sky. He reckons that revenue share is a matter of demand and supply. "If it is content nobody has access to, say a regional hit, then I have paid 80 per cent also. But if it is plain cricket or clips then anything between 3-10 per cent is fine," says he. While this lopsided split has caused bad blood between content firms and telcos, aggregators, remain sanguine. "It is what the market will pay. To complain is un-businesslike," says Vishwanath Alluri, founder, chairman and CEO, IMImobile. The Big Churn Against this background came four big changes. The first is competition. India's rapid mobile growth, attracted more players putting pressure on prices and margins. There are aggregators now for content, technology, content plus technology and a host of other things, crowding what is essentially a Rs 4,000 crore pie. So, "Consolidation has to happen," says Alluri. The second is revenue share. When there wasn't much competition this did not matter. But over the last five years, wellfunded technology or content start-ups don't see the need to take a lower share. For instance, Zenga TV started by going to the telecom operator. It soon discovered that it would get only 10 per cent and that too nine months after the sale. "We invest in the content, servers, technology. But they decide the price and who to sell to and how. And we don't have the right to audit their books. So we decided that we will not work with the operator," says Shabiir Momiin, CEO, Zenga. The third is the arrival of smart devices, such as an iPad or an iPhone that made it easier for aggregators to think of diversifying. So aggregators or content firms can sell apps or simply embed a service into the device. That means dealing directly with the device makers. "The new power centres now are the Apples and the Androids," quips one senior manager in a aggregator firm. And they are growing. One McKinsey study reckons that India will have about 450 million smart phone users by 2015. The fourth change, says Roy, "Has to do with the complexity of the ecosystem." He explains that when there is a request for a song, the platform has to recognise that the song will be played on a Blackberry or a Nokia phone. It has to be configured for different devices and operating systems. Until now only the PC and Mobile were used. Now all devices are smart, there is TV also, so the complexities keep increasing. Hungama, for instance, has about 900 people. Of these 300 are

engineers and 100 do meta tagging. Their job is to ensure that the content works across a staggering 2,800 different platforms. This complexity shifts the goalpost from being a vendor working on wafer thin margins to being a firm that can make better margins, either by innovating on technology, content, payment systems or by becoming a brand. The Final Word The holy grail for an aggregator now is to become big in 'off-deck' services. That is industry lingo for any mobile service that does not involve dealing with the operator on revenue share. Zenga for instance gets roughly half its top line from embedding its technology and content in handsets, 40 per cent from re-selling content to other aggregators and 10 per cent from advertising. Hungama reaches out to 16-17 million consumers on its own. It has worked extremely hard to become a part of the entertainment eco-system and Roy is a regular at most film and TV fora. The idea is to be a one stop-shop for any content company that wants to sell across say television, mobile, smart devices or anything else. So Hungama develops, publishes, formats and distributes content across 35 languages and 127 countries. "We tell the studios you focus on creation. We will get you revenues and reach," says Roy. "There is a huge inherent conflict in reaching out to consumers directly. Unless they (aggregators) can build their own networks, it will be a struggle. They don't have the capital, muscle power or the clout," thinks Farokh Balsara, sector leader, media and entertainment for Europe, India, Middle East and Africa, at Ernst & Young. He points instead to InMobi, an Indian company that quickly realised that going abroad was the best thing to do. It is now, says Balsara, the world's second largest ad aggregator after Google. Balsara's advice works for many aggregators, who remain wedded to the 'managed services' model. While much of this churn is unlikely to have worried telcos, it will now. In July last year the TRAI ruled that telcos must have confirmation in writing from a user before activating any value-added services and in certain cases, go through the same process even to renew subscriptions. This has already led to a decline in VAS revenues, say aggregators. Also, as average revenues per user (or ARPU) falls for telcos, the pressure on making more money from VAS will keep going up. Globally entertainment content drives the revenues on these businesses, so telcos need to work with broadcasters, production houses, cable companies and music companies. But the VAS experience has already created mistrust there. The only way to earn it back is through generosity. "A massive change will come when the telco pays 50 per cent. But for that to happen either you need regulation or for some operator to do it in the name of market development," says Singh.For inspiration all telcos have to do is look at one of the most popular aggregator brands in the world and how it tackled the Indian market, with its low bandwidth and net penetration. YouTube defines itself as a distribution platform for content from partners. Its first content deal in India was with Eros in 2007. Imagine, Colors, Zoom followed soon. When they generate revenues, through advertising online, YouTube gets half of those. "The revenues for some of our partners have grown more than two times in the last few years," says Gautam Anand, director, content partnerships APAC for YouTube. Of its global base of 800 million unique users, 25 million are from India. This number grew by 70 per cent over last year.

More importantly 25 per cent of the India traffic is from mobile phones. And just like Zenga, YouTube is not dependent on the mobile operator-a brave new world for content in India that should make telcos here a worried lot.