VAS the celling point, ask PEs

NEW DELHI: The mobile value added services (VAS) industry has got the global private equity industry in a conflict. While some PE players have blocked investment in the business due to its high dependency on mobile operators and content providers. Others are pouring millions of dollars in VAS firms, banking upon the potential of the mobile telecom market in India.

Top PE players like Sherpalo Ventures and Kleiner Perkins have decided to keep their hands off the sector while Sequoia Capital, Matrix Partners and Northwest Partners think otherwise. Says Sandeep Murthy, partner, Sherpalo Ventures and India representative of Kleiner Perkins: ���Most VAS players have very little brand building.

They spend lots of money on sourcing licensed content. They are dependent on the mobile operators who in turn charge high revenue share (above 80% in favour of mobile operators). We have decided to keep off from such service players.���

Most PE players are cagey about investing into VAS content aggregators. Alok Mittal, executive director, Canaan India says: ���We have set aside $450 million for investing in India. But pure aggregation play is not very interesting unless they offer something very unique to the operator or have a large and unique audience. They rely mostly on licensed content and have very little control if prices go up."

Others like Seqouia Capital, Northwest Venture Partners, Lehmann Brothers, Matrix Partners are upbeat about the sector. According to sources, Sequoia Capital has investments in Mauj ($10 million), Bharti Telesoft ($12 million), Nazara ($2 million), Bubbly Motion ($10 million). Lehmann Brothers recently invested about $15 million in Cellebrum.

Bharti Telesoft has received a combined investment of $13.5 million from WestBridge Capital Partners ($8 million), Sequoia Capital ($3 million) and Cisco ($2.5 million) diluting 10% of its stake. Northwest Venture Partners and Nexus have reportedly invested about $12-$15 million in Mobile2Win.com. Though when contacted to confirm the same, CEO Rajiv Hirnandani declined to comment.

PE players have already invested millions of dollars in the industry and there are concerns that it may repeat the dotcom bust era if these companies fail to perform. Many interested PE players are also betting on loss making VAS ventures. Others VAS players are receiving capital which is sometimes over six times its annual revenues.

"Rather than investing in loss making ventures, PE firms should put money on gambling in casinos, bet on horses or give away to charity. It is some hope, a little bit of analysis and lot of greed that's driving the current level of funding,��� says Saleem Mobani, COO of Hungama Mobile, a VAS player which has not taken any funding, as yet.

Adds Hiranandani of Mobile2Win.com: "There is lots of money chasing too few qualified wireless content providers. Nevertheless, companies are being over-valued which could be a danger.���

Other VAS players however differ. "Small VAS players are just buying content and selling at very low prices in order to boost their valuation. But investing in them can be risky. There won't be a bust, but a consolidation, where either operators or large VAS players will buy small ones," said an Indiatimes spokesperson.

Cellebrum COO Saket Aggarwal says: "The VAS market is here to stay. The industry is growing with an EBIDTA of 50-60% with a revenue growth of over 100% per year. Last year, share of VAS shot up from 8% to 11% in total telecom revenues. By 2007 end we expect it to shoot it to 15%."

There is an estimated $800 million lying with interested PE players to be poured into the $620 million VAS market. Over six million mobile subscribers are being added every month. 3G services are expected to come alive by his year end. With falling tariffs, VAS seems to be the only way to boost average revenue per user (ARPUs).

The global PE market is flooded with money. Seeing the tremendous growth in mobile services in India, every PE player wants to have a telecom play in India as US and Europe are already saturated. Larger ones like TPG and Blackstone can fund a Hutch buyout, but hundreds of smaller ones can afford only the VAS market (or tower business which is yet to emerge).

This is driving lots of irrational funding in the market. Though many players have understood this early, others have not. While a dotcom type bust is unlikely, irrational funding may surely push millions of hard-earned dollars down the drain.