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The Russian VAS Market in 2006-2007

In parallel with the Web universe the Russian mobile world is emerging fast. In 2006 the Russian value-added services (VAS) market developed steadily, and continued its growth in 1Q 2007, reaching USD 615 million, a 34% year-on-year growth, reported ComNews Research. All three major players of the VAS market, operators, content providers (CP) and aggregators, as well as subscribers are growing with it. Major Russian mobile operators introduced more aggressive and assertive policies in the VAS scene, launching new WAP-portals and services and severely reducing the number of content partners. The VAS share in operators' overall revenue structure reached 14% in 1Q 2007. With the launch of the first 3G networks in 2007-2008, Russian operators will only increase their content offering. Consolidation and stricter policy by operators cut the number of core content providers to 80-100 companies. Last year CPs honed their skills in providing IVR and RBT services, pushing for more video content, mobile games and community services.

Major CPs pushed for better quality content offering, introduction of new products and global market expansion. Today the winning formula of the Russian VAS market is ensuring content quality and diversity of products and services. IVR, SMS-based TV lotteries, RBT and mobile games starred in the most popular and successful content services section. IVR services referred to the "Lady Luck" of revenues in 2006. Furthermore, continuous WAP penetration growth, mobile community services and user-generated content all promised that this year will be positive.

However, the other resurgent market has its pinch of salt. Piracy is on the rise, while low content quality and SMS-spam remains a significant obstacle to the market's faster development. Finally, remaining high WAP-traffic rates and operators' high revenue shares serve as the additional burden to the market evolution.

What's the Name of the Game?

Pavel Roitberg, Head of Department of Products and Services, MTS, noted at the last Mobile Content Forum held in Moscow in June 2007 that "we have changed the rules of the game." While before MTS, the largest Russian mobile operator, had 250-300 content partners, the analysis showed that 70% of all revenues come from 15 major partners, 20% from 20 CPs and 10% from 35 partners. As a result, MTS concluded contracts with ineffective partners, thus cutting their overall partner number to about 100 companies. And this is pretty much the same situation for its rivals, VimpelCom and MegaFon.

Low quality of content, as well as an abundance of fraudulent offers, diminished subscribers' trust in CPs and rejected in a sharp fall of content sales in 2005. Learning from that negative experience, major operators and content providers rushed to ensure the better quality of mobile content. For example, MTS created a content quality control program making its partners directly responsible for the content quality. At the same time, major Russian CPs created an association to control mobile content offerings.

In 2006 the sales of "heavy" and expensive content larger further, as subscribers got more familiar with video, games, software applications and full mp3 tracks. Subscribers 'purchasing power in major urban areas increased, and they are satisfied paying more money for' heavy 'content A noticeable trend of 2006 is the resurgence of operators' activities in the VAS niche. , and took part in joint promotion with some largest content providers.Moreover, operators launched new billing methods, such as WAP-tariff: MT-charge and WAP-click.

WAP Nets Grow Further

iKS-Consulting estimated an average monthly WAP-audience in Russia at 14 million users. An average user is male (65%) in the 17-23 age group (60%), says WAPStart research. The highest growth rates for new subscribers are in the emerging regions. 71% of subscribers browse WAP via pre-installed mobile browsers. In April 2006, there were over 80,000 Cyrillic WAP-sites. However, only about 20 WAP-sites have large daily audience.

Below is the TOP-5 of WAP-searches in May 2007:

1. Porno – 42.00%

2. Free Stuff – 29.49%

3. Software (ICQ, jimm, Opera, AV Programs) – 7.23%

4. Gays – 2.75%

5. Mail.ru – 2.65%

Source: poisk.wapstart.ru

MTS has been among the most active mobile operators developing the VAS niche. It launched a new well-designed WAP-portal and streamlined its cooperation with content providers, facilitating the content aggregation market. MTS 'direct competitor and Russia's number 2 operator, VimpelCom ("BeeLine"), started successful voice-CPA and WAP-CPA programs.

In 2006 major mobile content providers significantly diversified their services and continued their expansion to the neighboring CIS market, as well as globally, such as INFON (Belarus), InformMobil (Tajikistan, Georgia and Kazakhstan), i-Free (Brazil and India) and Estonia, Estonia, Estonia, Prewar. Other content providers, such as A1 and Interactivi honed their skills in mobile marketing and intellectual branded services. For example, A1 actively enhanced major FMCG brands in Russia and launched its new Java-based mobile community services "Ogloblya." Similarly, Interactivi reported that during 2006 the company worked with some 1 million subscribers in Russia and organized over 60 successful promotional activities.

There were changes in promotion strategies as well. Many CPs admitted that TV advertisement efficiency is diminishing, while prices for placing an ad are skyrocketing. As a result, many CPs shifted their advertisement budgets to the WAP area and B2B partnership development. Yet some CPs still rely on TV advertising, for example, Nikita Mobile was on the 13th place in the TOP-100 major advertisers list in 2006.

Bumpy Road

Despite the steady growth of the mobile content market, several challenges remain unresolved. One of the most widespread was the lack of creative content and services. Overall, low content quality and a lack of education amongst subscribers significantly decreased faster market take-up. For example, low quality SMS-based TV contests undermined subscribers' trust: in many cases subscribers received a great amount of SMS-spam. Furthermore, many market analysts noted that mobile operators' revenue share was too high, and that asserted in an increase of the content price. In addition, high WAP-traffic costs added to the burden of increasingly expensive "heavy" content to mobile subscribers.

All About XXX: Mobile Games Sales Set to Grow

Some 15 million copies of mobile games were sold in 2006, estimated Playmobile. Mobile games are perceived by many market analysts and players as being among the future revenue generating giants. The adult and brand games generated the most profits, and will remain popular in 2007, said DDM in its mobile game research. Erotic games generated almost 50% of revenues, while brand games accounted for 20% -40% of revenues followed by casual games. Among other potentially interesting products are multiple player games, advertisement games and PC-title games.

TOP-3 mobile game developers:

QPlaze-RME

Shamrock Games

Herocraft

TOP-3 Russian mobile game publishers:

QPlaze-RME

Mobile Content Factory

Herocraft

TOP-5 Russian mobile game distributors:

PlayFon

Infon

Iricom

Nikita

Playmobile

Mobile games – core sectors:

Casual games

Brand games

Adult games

Source: DDM, # 1 2007

Dynamic VAS Quarter

In the first quarter of 2007 the market continued its dynamic growth. According to ComNews Research, during this period Russian VAS market totaled USD 615 million, which is a 3% increase over 4Q 2006, and 34% year-on-year growth. The VAS share in operators' overall revenue structure reached 14%.

ComNews Research emphasized the growing popularity of WAP services, as well as continuous growth of prices for the end users. The two sides blamed each other for the increase in price: operators think that the problem lies in theability of CPs to produce meaningful and quality content, while CPs believe that operators have oversized revenue share.

20% of operators' revenues came from the VAS segment. The whole structure of VAS revenues (gross) was as follows:

Base services – 6% (USD 36 million)

Content – 20% (USD 124 million)

M-Internet – 20% (USD 123 million)

Messaging – 54% (USD 332 million)

Source: ComNews Research

In 1Q 2007, mobile Internet bought some USD 123 million to operators, almost matching mobile content revenues (USD124 million). The main trends of 1Q 2007 are practically similar to the ones in 1Q 2006. Revenues from customization services are falling, while IVR and RBT continue to be on-demand. Other fresh sectors are community services and m-commerce. Thus, i-Free reported of successful launch of its Jamango, a mobile community portal, in a number of global markets, like India and Singapore. Other trends include, mobile phone customization at the production stage and popularity of SMS-based contest technology.

Yet, content operators can no longer ignore the new trend: active promotion of operators' own portals. Their sales significantly increased to almost 35%.

Average revenue share structure between CP and operator in 1Q 2007 was 61% and 39% respectively, said ComNews Research.

Mobile content revenue structure:

Customization – 34%

M-Commerce – 3%

Games – 14%

Infotainment – 16%

Chat / Community – 9%

M-Marketing – 6%

Media Projects – 18%

Off-portal sales prevailed over portal, with 65% and 35% share of the market, respectively.

How does the future look? According to Playmobile, the growth of brand and erotic games sales will continue in 2007. The company estimated that some 25 million copies will be sold this year. Multiple role player games and PC-titles games will increase. Yet, ComNews Research predicts that in 2007 the mobile content market will grow only 16% and reach USD 520 million. To sustain their revenues, CPs will have to think of diversification of their business, moving towards corporate business areas.

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