Can voice SMS services succeed in growth markets? Daniel Jones February 2009 Case Study

2 © Analysys Mason Limited 2009 Executive summary This case study looks at the potential for voice SMS services. It concentrates on the example of Bubble Motion’s BubbleTALK, because of its strong position in this market. The case study describes: w the service itself w evidence of its use in practice w potential heavy usage segments w drivers of usage w suitability for reproduction in growth markets w costs and benefits for MNOs introducing the service. Can voice SMS services succeed in growth markets?

3 © Analysys Mason Limited 2009 Voice SMS bridges a gap in mobile communication services Bubble Motion’s BubbleTALK enables asynchronous voice communication. As shown in Table 1, voice SMS falls into the category of communication usually offered by MNOs only through voic . Voic is a similar form of communication, but differs in that it is not a deliberate, selectable form of communication: it is the ‘back-up’ system for when a voice call is not possible, and users do not generally set out with the intention of leaving a voic . This defines a niche for voice SMS, although it faces extremely tough competition from voice calls and SMS. Can voice SMS services succeed in growth markets? Real-timeAsynchronous VoiceVoice callVoic Voice SMS DataInstant MessagingSMS Table 1: Typical methods of communication for mobile subscribers [Source: Analysys Mason, 2009]

4 © Analysys Mason Limited 2009 Voice SMS services are simple to use Voice SMS messages can be sent in two ways, as shown in Figure 1: w by dialling *, followed by the number w by selecting the option from the handset menu system, if this has been implemented. Clearly, ease of use is greater if the handset menu includes the option to send a voice SMS message, but this has yet to be implemented on a wide scale. Recipients of voice SMS messages get a standard SMS containing a link to their spoken message. Figure1: Typical procedures for sending a voice SMS message [Source: Analysys Mason, 2009] Dial phone number Dial * Record message Choose ‘Send voice SMS’ from menu Select contact Record message Can voice SMS services succeed in growth markets?

5 © Analysys Mason Limited 2009 Two years after launch of the service, the results from Egypt look promising The Egyptian market provides an example of the evolution of the voice SMS service over almost two years (it was launched by Vodafone Egypt in December 2006). By May 2007, the ARPU of active users of voice SMS was reported to have increased by 1.5%. Based on figures from 3Q 2008, we estimate that voice SMS now accounts for almost 4% of blended ARPU for the active user base, as shown in Table 2. Bubble Motion estimates that capex of USD is required to launch the service; it suggests that operators will see a positive RoI in a matter of months. Opex is also said to be low; taken together with an estimated monthly revenue of USD , the service appears attractive. Average voice SMS per user per month8181 Revenue per voice SMSEGP0.3 (USD0.05) Voice SMS revenue per active user per month EGP2.4 Blended ARPUEGP61.5 (USD11.1) Voice SMS revenue per active user as a proportion of blended ARPU 4% Total monthly revenue from voice SMSEGP4.7 million (USD ) Table 2: Vodafone Egypt’s estimated revenue from voice SMS, 3Q 2008 [Source: Analysys Mason, 2009] 1 Based on information from Bubble Motion. Can voice SMS services succeed in growth markets?

6 © Analysys Mason Limited 2009 Voice SMS will appeal particularly to certain market segments Take-up of new services can be improved by analysing usage data to pinpoint the market segments in which usage is high, and targeting marketing at these segments. Potentially lucrative market segments for voice SMS are shown in Table 3. SegmentReason for usage Youth segmentHigh adoption of SMS, and sometimes IM, messaging seen already. The ability to send messages that contain more emotion using voice SMS appeals to this segment TechnophobesThose uncomfortable with using SMS may find that voice messaging is a more natural communication platform, providing the service is easy to use Foreign language communities Potential users may find it difficult to type SMS messages if handsets use an alphabet with which they are not familiar. Voice SMS may be a more convenient messaging platform Table 3: Target segments for voice SMS [Source: Analysys Mason, 2009] Can voice SMS services succeed in growth markets?

7 © Analysys Mason Limited 2009 Adoption increases as knowledge of the voice SMS service spreads virally Thomas Clayton, CEO of Bubble Motion believes that, although marketing of voice SMS is useful, the key to adoption of the service is its ease of use. “Take-up usually increases virally,” Clayton says, as a result of the messages being sent, rather than as a result of marketing campaigns. The Turkish market provides an example of this: a trial involved sending an SMS notification of the new voice SMS service to subscribers. Of those in the trial, 800 (4%) became active users. However, in the following months, a further subscribers who had not taken part in the trial became active users of the service, even though there had been no further marketing. Drivers of adoption The network effect, enhanced by the availability of the service to a large percentage of subscribers The ease of use of the service Extensive marketing of the service by the operator The ability to use the service on all handsets Upgrading handset software so that sending a voice SMS is a menu option Pricing that is competitive with, or similar to, that of SMS messages Barriers to adoption The established position of competing voice and text- based services, such as voice calls and SMS messages Regulation that prohibits over-the-air upgrades of handset software to facilitate usage The lack of agreements about off-net message sending between operators within a market Can voice SMS services succeed in growth markets?

8 © Analysys Mason Limited 2009 It is critical to price voice SMS correctly, relative to SMS OperatorCountryCost to send SMSCost to send voice SMSComments Vodafone EgyptEgyptEGP0.30 Free message retrieval. Same price as SMS to send Orange JordanJordanJOD0.03JOD0.03 per 30 secondsFree message retrieval. Same price as SMS to send AirtelIndiaINR1.5INR0.75 per minuteFirst retrieval of voice SMS is free; replaying the message is charged for. Half the price of SMS to send TurkcellTurkeyTRY0.22 (USD0.14) Free message retrieval. Same price as SMS to send Table 4: Pricing of selected SMS and voice SMS services [Source: Analysys Mason, 2009] The cost of voice SMS to the subscriber, relative to the cost of SMS, is key: initial low pricing could encourage adoption, but undercutting the price of SMS could lead to a substitution effect. By charging the same price for voice SMS and SMS messages, the options for subscribers are made simpler. This sensible strategy is being pursued by many MNOs, as shown in Table 4. Can voice SMS services succeed in growth markets?

9 © Analysys Mason Limited 2009 The potential user base for voice SMS is much larger than that for 3G services, but interoperability may be a problem In comparison with those for other value-added services, the potential user base for voice SMS is very large, because of the few handset requirements and the relative simplicity of use (see Table 5). This makes voice SMS similar to voice and SMS services: as for these, interoperability between networks is crucial and could be a sticking point. The ability to exchange voice SMS messages across networks will improve take-up. 3G handset required? Service improved by interoperability between networks Extent of technological familiarity required VoiceNoYesLow SMSNoYesMedium Voice SMSNoYesLow Mobile TVYesNoHigh Mobile InternetPreferableNoHigh Mobile paymentsNoYesLow Table 5: Key factors affecting total number of users of selected mobile services [Source: Analysys Mason, 2009] Can voice SMS services succeed in growth markets?

10 © Analysys Mason Limited 2009 Voice SMS services could be reproduced widely in growth markets FactorComments DemandDemand for this basic communication service is likely to be fairly similar from market to market. Where the population uses an alphabet not usually available on handset buttons, demand is expected to be higher; this is often applies in growth markets Competitive environmentCompetition comes mainly from other messaging services, notably from SMS. Although SMS usage varies tremendously across countries, the fact that prices of voice SMS and SMS are usually similar means that voice SMS will represent a similar threat in each market Technology requiredFor the MNO, installation of the relatively small amount of new hardware required to offer voice SMS is quick (3–8 weeks). For the subscriber, any handset suitable for basic voice and SMS services can be used; this represents a markedly lower barrier to adoption than for many value- added services RegulationLittle regulatory intervention into voice SMS is likely. The only regulatory difficulty that may be encountered is with over-the-air upgrading of handset software to facilitate greater ease of use Investment requiredCapex and opex requirements are low Table 6: Factors affecting reproducibility of voice SMS services [Source: Analysys Mason, 2009] Can voice SMS services succeed in growth markets?

11 © Analysys Mason Limited 2009 Increased consumer spend, use of existing infrastructure, and low operator costs make an attractive business case The costs of launching voice SMS, in terms of capex, are low, estimated at below USD Opex can also be kept low, using low-cost marketing techniques, such as SMS-based marketing to targeted segments. Few incremental costs are associated with the service and take-up reportedly leads to no decrease in usage of other services. The service compares favourably with many other value-added services that require more extensive marketing. The most significant part of opex for the voice SMS service is likely to be the share of revenue taken by the vendor. Services such as that in Egypt, which generates incremental revenue of USD per month, are clearly profitable, before the vendor’s share is taken into account. Given that there is competition between vendors in the field, MNOs should be able to negotiate an agreement that allows the service quickly to become NPV positive. Can voice SMS services succeed in growth markets?

12 © Analysys Mason Limited 2009 Competition between vendors can bring about lower costs for MNOs A number of vendors with similar solutions are active in the field of voice SMS, ensuring competition and bringing down prices for MNOs. w Bubble Motion has deployed voice SMS services for operators including Bharti Airtel, Digi, Indosat, Turkcell and Vodafone Egypt. w Kirusa’s customers for voice SMS solutions include Etisalat, Ufone, Uganda Telecom, Vodafone India and Zain Group. w Mobile Arts has deployed its voice SMS solution with Telenor in Pakistan. In February 2008, the service became interoperable with the voice SMS service Kirusa provided to Ufone in Pakistan. Can voice SMS services succeed in growth markets?

13 © Analysys Mason Limited 2009 Conclusions Considering the business case for voice SMS as a standalone service, experience so far suggests that it is likely to be profitable. There is evidence that use of the service increases ARPU, while costs associated with the service are low. The provision of voice SMS may also lead to lower churn among heavy users. An advantage of voice SMS over traditional SMS in growth markets is that it does not requiring typing, which can be difficult when the user’s native language requires an alphabet different from that on the handset keys. The service is also attractive because it can be used widely, even on basic handsets. The main factors that might slow its adoption are non-integration of voice SMS into the handset menu and the lack of interoperability between networks, which would mean that off-net recipients could not reply to their messages. Voice SMS has many factors in its favour, but it faces stiff competition from all the other forms of voice and text-based communication that can be made from a mobile handset. As such, we conclude that its implementation by operators in growth markets is likely to be beneficial to the operator, but its impact will be small. Can voice SMS services succeed in growth markets?