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VAS consolidation – the full picture

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From the first voicemail and SMS message to today’s Over The Top (OTT) offerings, mobile operators have gone full circle in their approach to Value Added Services (VAS), writes Francois Joubert, regional director at TruTeq Group.
From its beginnings as an exciting new source of revenue, VAS has now been commoditised to the extent that it is viewed as part of a standard offering for any basic mobile communication service package. As the technology lifecycle has matured, new ways of responding to the resulting pressure on margins has brought about significant changes in the VAS market.
The entry of core network vendors, combined with major mergers in the market, reduced the number of market players and also increased the size of those players in terms of revenue and customer base. All of this contributed to the momentum of VAS consolidation.

Margin and market penetration
Over the past five years MNOs have become under more and more margin pressure as their markets saturated and subscribers demanded lower costs. The general response has been to consolidate as many of their systems as possible and VAS is no exception. The fact that hardware footprint and software virtualisation has moved the boundaries of what can be done on a single system has enabled mobile operators to reduce operational expenditure (OPEX) dramatically.
Gone are the days of VAS systems occupying entire equipment rooms. Now similar capacity solutions can be hosted in the cloud or installed on equipment that can fit into a single rack.
Another benefit of the strategy was the simplification of the deployed solutions both technically as well as commercially. Thus, when any mobile operator’s financial team looks at this, they typically get extremely excited. Let’s look at the simplified example below:
* A system older than five years was typically installed during the growth period of VAS services and this was reflected in the higher purchase price. For the sake of the example let’s say the purchase price was $1,000. Support and maintenance contracts are priced as a percentage of the original sales price. In this example we work on 10%, bringing annual support and maintenance to $100 per service. For a network running Voicemail, IVR, SMS, MMS & USSD, this meant a total of $500 per year for support and maintenance for the 5 services. For underutilised services (e.g. MMS) this pricing model resulted in loss making services. Loss making services still have to be maintained as subscribers expect these as a minimum service level. Now, with the recent developments in hardware capacity as well as the commoditisation of VAS services, these services are available at much lower price points with better performance. The new price point for VAS services are at most about 30% of prices of 5 years ago and this means an MNO can enjoy greatly reduced OPEX by simply replacing old with new. The example from above in today’s pricing means that the equivalent services can be bought today for $300 per service. If the same support and maintenance pricing is applied, the total annual cost is $150, resulting in at least a $350 saving per year. And this is if the silo approach is still followed and a like for like old for new approach is followed. With full VAS consolidation this picture improves even more, with savings on the complete ecosystem ranging from 50% upwards.
To further sweeten an already great opportunity to reduce OPEX, there are a number of indirect benefits from this strategy that are worthy of mention.
* Much tighter integration between services allows for new multi-bearer services that would otherwise have been difficult to deploy.
* VAS consolidation immediately reduces the complexity of systems deployed by the MNO, resulting in eased pressure on human resources, training and resource redundancy.
* Much higher performance levels on low cost, off-the-shelf hardware or even virtualised.
* The much reduced deployment footprint improves technology/service density resulting in delayed needs for facility expansion and in some cases even negates the need for it completely.
* Reduced power consumption and heat dissipation results in direct cost savings on day to day operational expenditure.

That’s all good and well but…
The above benefits however come with a huge disclaimer. As with all systems, changes on one level often have an impact on other levels of the business that cannot be ignored. With increased competition and resulting pressure on profit margins, the natural reaction of many networks was to look for financial answers to the financial pressures.
Few would have thought there might be a downside to this strategy, especially given the obvious paper benefits of consolidation. But did the pendulum swing just a little too far?
The least desirable position for any MNOs is to be a “pipe” where margins will shrink even further because they have to compete with Internet Service Providers. VAS remains the only factor that differentiates an MNO from a “pipe”. VAS reduces churn and offering innovative services on top of it creates subscriber loyalty. Sadly, following a consolidation strategy without careful consideration brings about a number of unintended consequences.
A common pitfall occurs when mobile operators, driven by large discounts in bundled deals, begin to see VAS as a mere line item (normally discounted to some value close to zero) hidden or even lost between the cost of base stations and other network equipment. The true cost of consolidation in this case is reduced flexibility, reduced innovation and dependence on the lead times of large suppliers for even the smallest change requests.
MNO VAS teams have been relegated from the heroes of yesterday to purely maintenance staff and the MNO loses vital skills and self-reliance. The drive to find new and innovative ways to provide new revenue streams may easily be lost in the drive to reduce OPEX. This raises the question of whether VAS commoditisation is creating the opportunity for OTT players and helping them eat into MNO revenues.

Don’t become a pipe
The answer to this conundrum still lies with flexibility and the speed of innovation. Solution providers who are focused on the best possible solution (best of breed) are critical in the effort to remain innovative and competitive. Essential to any MNO is the ability to respond rapidly to changes in the market at a cost that will not hamper the value proposition.
This lesson is well understood by the motor manufactures of the world. They understood that to be competitive they needed to use smaller, faster suppliers rather than trying to build each and every component in the same factory. Today cars are assembled in factories, using parts from best of breed manufacturers from all over the world. In a similar manner, MNOs should build fit-for-market services that are everything but a one-size-fits-all commodity.
A practical example of this is the rebirth and growth of USSD as a basis for mobile banking in Africa. With the use of USSD, mobile operators were able to provide a new banking service to the large unbanked customer base in Africa.
At first the attempt was to use Sim Tool Kit solutions, but these proved cumbersome and slow to change in response to market needs. USSD based services were not only catching up in terms of traffic and services, but rapidly overtaking the traditional leaders in the market. This was only achieved through rapid deployment of new innovative services like micro lending, insurance and money remittances. Some operators launched new services every two to three weeks.
A new, vibrant service was born out of existing technology. This was only possible due to the agility of relevant technology partners, enabling timely response to market driven needs. One can imagine how much more would be possible if the USSD platform could also securely send One Time Pin (OTP) SMS messages for internet banking, and MMS pictures for monthly statements. The synergy of these technologies creates new and exciting value propositions that are relevant to end users and difficult to replace by OTT solutions.

In conclusion
Even though VAS consolidation is a critical part of any MNOs strategy for improving profit margins, the importance of innovation as a key differentiator should not be ignored.
The need for best-of-breed solutions through technology partners that have a deep understanding of the technology and the market cannot be over emphasised. In the attempt to avoid the “pipe-only” business model, the only differentiator for the modern mobile operator is still VAS. Specifically, value added services that can be provided rapidly in response to specific customer needs.