Saw an advert by Vodafone recently talking about the launch of their femtocell gateway. It caught my attention because B was designing the gateway last year - was exciting seeing something finally enter the market. There are two Vodafone pricing models - a one-off purchase and a monthly rental. But I do wonder if the product will ever take-off.

Will the customer really be willing to invest in a femtocell gateway for their home?

Unless the user has atrocious signal at home and it is imperative that they have cellular connectivity, I doubt it will pick up. There may certainly be the early-adopters but for a mass adoption, there has to be a strong buying rationale.

The key question for me is - what is the business model? Who is getting the benefit and who will pick up the cost of the gateway? Were it a feature of the triple-play gateway provided by BT, France Telecom etc, I can see a demand for it - I can also see people talking about the feature and wanting it - along with their exisiting box with is provided by the operator. But to go out and purchase and additional piece of equipment..well...

And then we come to the small offices which may have been another market. But here you have fixed mobile converged solutions wherein all the mobile traffic can be diverted on an IP network.

Of course, thats where the business model comes in. The gateway is provided to the end user by the cable/ IP service provider who may or may not have an interest in providing a femtocell connectivity in the gateway. Do we see any joint opportunities say between a BT and a Vodafone?

Just talking about me, I am already pained by the fact that with the Sky box, I have to use an additional wireless modem unlike the BT triple-play gateway....

Phrases

I love the one-liners in Mash - they never seem to age..
Alan Alda to a gun pointing Korean - 'I know I'm dressed to kill but you dont have to take it so seriously' :-)

Fingers crossed

Will I .....wont I.......cant seem to get over with the question and move on. And just when I will manage to forget and get life started again, the results will be out....and then....

Passively enhancing the active monitoring of valued growth opportunities

Let’s assume the investor’s IPS is being put in effect – so the risk return parameters have been decided. The constraints of time horizon, liquidity, legal and regulatory requirements, taxes and other unique circumstances have been determined and recorded. On the basis of the above, we have now determined the asset allocation strategy. The requisite process now has to be initiated for investing the proportion of the funds earmarked for equities.
For starters, the simplistic question – why would one look at equities? Not only do they have a higher return and greater diversification, if we target international markets as well, but they also provide a useful inflation hedge. Fixed income instruments have a fixed cash flow, the value of which will decrease with increasing inflation. However, in the case of securities, there is a useful hedge, particularly if the firms can pass on the inflation to the end-customer, depending on their industry and competitive position.

So now we have determined the asset allocation for equities. Next step, what is the approach to be followed for investing the funds – passive, enhanced indexing or active investment. Passive investing is preferred when the manager believes in the efficiency of the market, doesn’t have sufficient information about international or small/mid-cap markets or does not want to take on the burden of taxes due to the increased turnover associated with active management. The active approach varies depending on the active return to be generated and the acceptable active risk i.e. the standard deviation of the active return over the benchmark. The propensity of the investor to accept active risk depends on their belief that the selected portfolio manger can generate that active return or alpha. However alpha is not easily generated and in a lot of cases, the manager is measured against a passive benchmark and hence will be further hesitant to take on active risk or deviate from the benchmark.

The two strategies that can be followed are the core-satellite approach and the completeness fund approach. In the core-satellite approach, the investor has a core holding with passive or enhanced indexing. This is supported by a satellite of active holdings. The satellite holdings generate the active returns and the core holdings mitigate the active risk. In the completeness fund, the investment manager has an active portfolio which is supported by the completeness fund such that the combined portfolios have a risk exposure similar to the benchmark. The problem as I understand is that the active fund will be benchmarked to a relevant benchmark rather than the broader market benchmark. Hence from the investor’s perspective, there will be a misfit risk i.e. variation with respect to the broader market benchmark which is the required performance measurement criteria.

Before we move any further, let’s define these benchmarks that we have been talking about. There are various broad market indices that we are all familiar with which are used for passive indexing. There are also institutions which create a range of indices for mutual funds, ETFs etc to measure their performance against. Indices can be categorised as price weighted, market weighted and equal weighted i.e. one share of all securities in the market, equal value and equal amounts invested in all shares in the market. The most preferred is the free float adjusted value weighted index. When the indices are needed for active management, they can be constituted based on their style as value stocks, growth stocks, high earning stocks, high price multiple stocks etc. A stock can be allocated to a single index. It can also be allocated across various indices if the style of the security is measured as a quantity. Indices can also be reconstituted depending on requirement but that may cause a drift away from the intended purpose of the index.

And what is this style that we were just talking about: the investor has the option to follow value/ growth or market strategies depending on the ‘style’ of the security. (While I’ve covered this in a previous blog, just a summary once again) Value investing is when the stock is undervalued (looking at the multiples) and the investor expects it to revert to the mean. The kind of stocks that would be looked at would be high dividend yield stocks, low priced or contrarian to the market. It may also be investment in high volatility cyclical stocks which are down at a certain cycle in the market. The growth investor would invest in stocks which have historically been exhibiting high growth numbers – i.e. long term high growth, high sales, high earnings – i.e. momentum or constant performance stocks. Market of course is the average and could just be a sector rotation, reasonably priced growth or a slight tilt to any of the other two.

The investor would monitor various managers and their style preference either on the basis of their total return analysis with respect to mutually exclusive and exhaustive benchmark indices over a single period of time, over multiple periods of time or analyse their holdings to determine the strategy that they are following.

So, going back to the investment of the funds – what are the strategies for passive investing? One could have a portfolio invested along the lines of a selected index, invest in mutual funds, buy ETFs, buy index futures, or equity swaps. The last is the preferred option for international index exposure or for avoiding withholding tax. If we consider the first i.e. manually indexing to a selected index – the question arises – how do you select the securities that you should be buying. The options are - buy them all, select them in a stratified manner or try various models and map the factor exposures of the index.

For enhanced indexing, the investor can go long/short index stocks, depending on their beliefs of the stock or the industry, thus changing their weighting in the benchmark index being followed. They could also use the cash position to change the duration of the portfolio by investing in equity futures or short term fixed income securities.

And then we move on to active investment. After undertaking active fundamental analysis – either top-down or down up – to identify mispriced securities, the investor can either go long under priced securities or use the long-short approach which can generate two alphas, allow symmetric distribution of weights, allow elimination of systematic risk but also increase the risk due to the leveraged component i.e. securities which may have to be returned when the pricing is not conducive. Now, lets assume that the investor has decided on the long-short strategy and created a market neutral portfolio but now wants to add some systematic risk or duration to the portfolio. She could then go long either ETFs or futures – the options (or rather derivatives) are always there.

Moreover, there are numerous theories and disciplines around active investing. So to categorise when the investor would sell – we have given them various names – opportunity cost, target price reached, valuation reached, deteriorating fundamentals, down from cost, up from cost. The only fact which has been analysed and observed is that value investors typically have much lower turnovers as compared to growth investors.

So to summarise – what is equity portfolio management all about? Deciding how much of the portfolio should be under passive, enhanced, active management. Is the focus on value, growth, mid-cap, large-cap etc? What is the tool to be used for the passive fund investment? What are the tools to be used for the enhanced fund investment? What are the tools for active fund investment? For each of these, how will the performance be monitored? If temporary changes are to be wrought, how can the investment manager go about it?

Et voila – c’est tout.

Is this true?

Different philosophical approaches. This is from someone's philosophy to life. If he follows it, I can bet he has a very happy life:
"Work-life and social-life (non-work-life) are part of the same continuum. Behaviour unacceptable in your social life, e.g. lying and treating people with disrespect, should be considered equally as heinous at work. Similarly, laughing, having fun, and showing emotion, should be equally acceptable in your work life."
But somehow I doubt it's really possible.

The crisis for dummies

Unbelievable

Watching the Bank Chief Executives before the Government panel - these politicians are unbelievable idiots! There should be at least some level of understanding of finance before they are put there on the panel. One of the Labour politicians,a Cousin, asks - Did you know that your mortgage portfolio had exposure to exchange rate risk? What kind of a dumb question is that! Its an international bank for crying out loud - of course, they would have exchange rate risk!!
They are turning it into a purge.....

Unconcerned, but not indifferent

I discovered Man Ray today. What a portfolio!

Here are a couple of pics just to see whenever in the mood:



I'm going to try and lay my hands on his autobiography - 'Self-Portrait'. Another American absorbed by Paris dans le temps de Gertrude Stein, James Joyce, Cocteau

One of his quotes: “Of course, there will always be those who look only at technique, who ask 'how', while others of a more curious nature will ask 'why'. Personally, I have always preferred inspiration to information.”

Which makes me wonder - At what age do we kill the 'Why' in a child?

India - a fight between VC and PE; maybe not....

It’s interesting to see the VC strategies being followed in the Indian market. Till last year, I used to find the distinction between VC and PE in India a little arbitrary because of the kind of sums involved but it’s now beginning to make some sense. There is an area of overlap in terms of the amount of money invested and the stake taken, but in such cases the markets which are being targeted by the investee will vary.

Basic definitions:

A venture capitalist invests in early stage start-up or formative companies which have either not launched or have just launched their product; revenues would not be anything to write home about.

Private equity, on the other hand, invests in firms with well-established business models and significant revenues. This could be just pre-IPO. It could also be to take a publicly listed company private or perhaps just one of their divisions. (PIPE as its called – private investment in public entities)

The general expectation is that as one moves from PE to VC, returns would be higher as would the risk component.

And now we come to the VCs and the PEs entering the Indian market. And that is the quirky element. VCs don’t necessarily seem to have a focus on technology growth – as in the US or more relevantly, Israeli markets. The risk component they are incorporating seems to be associated with geography i.e. emerging countries, and the evolutionary nature of the markets as a whole.

One interesting example from yesterday; Norwest Venture Partners, a VC firm from the US has picked up a less than 5% equity stake in On Mobile from the open market. So, now you have

- A very active early stage VC

- picking up a minority stake

- in a publicly listed,

- mid-market company

None of these are the tenets of a western venture capitalist. On Mobile’s current investors include the likes of Infosys, Deutsche Bank, Goldman Sachs and Polygon Investment Partners – none of them being the VC space players. But then Norwest themselves elaborated on their strategy for the Indian markets – growth and late stage investing as well as PIPEs i.e. minority investments in large companies who are leaders in their space. Some of their other investments – Adventity, the KPO, Suvidhaa (that’s an old name – service commerce), Yatra etc.

But then at the other end of the spectrum you have VCs like Accel Partners – their website talks of seed and early stage investing. They are investing with an already active group of people – Erasmic Venture Fund – which should certainly give then a better idea of the market. Another interesting one is Helion Ventures. A lovely aspect of all these VCs is that it gives a whole new set of entrepreneurs a chance. In India you never had a chance to think of starting a ‘business’ unless your dad had the money. But it’s now completely about what you have done with your life – not where you are coming from.

So, where does that leave the poor PE guys? It will take them a while to recoup the losses they will end up making on their investments made at the peak of the market. After all, at that point in time the fight was for the Escorts, Ranbaxys and DLFs. Those were interesting times – for the family entrepreneur, it was far cheaper to raise money from the public markets. But then you had these PE firms, strong believers in the Indian growth story and huge piles of money waiting to be invested. End result – sky high valuations. It remains to be seen the kind of IRRs the funds raised in 2007 will earn on their investments. The clear winners will be the new funds investing today.

Where's the money going?

I have been wondering recently about the drivers of VC investment. What tilts the scale between a term sheet and a ‘thanks but no thanks’. At a recent talk, I asked that of someone from a large UK based VC but the answer I got was about the light shining in the entrepreneurs eyes etc – well……So it was a welcome surprise to read a blog entry by Fred Destin from Atlas. It elaborated on the strategies being followed by VCs in the current environment and served to explained some of the recent investments and discussions I have seen and had respectively. Also, it was an interesting comparison of fixed income yield curve strategies to the VC investment focus.

First and foremost, what is a fixed income yield curve? – Its essentially the movement of short term interest rates expected over time. Hence, a downward sloping yield curve would mean that the market is expecting interest rates to fall. Corollaries to that are, of course, that the market is expecting growth to slow down, inflation to fall, the central bank to initiate supportive measures – one of which will be reduction of interest rates. As an investment manager, if you believe in the accuracy of the trend, you will start to increase your fund allocation in bonds and start moving away from stocks.

It’s completely the reverse for an upward sloping yield curve which would imply that in the medium to long term interest rates are expected to be higher than they are currently. Hence, it would mean that markets are going to expand, there will be restrictive monetary policies followed and interest rates will rise; further, prices of bonds will fall and hence the smart investment manager will move away from bonds to stock investments.

Disclaimer: For simplification purposes, we are considering only the impact of monetary policies and not fiscal policies etc on the shape of the yield curve.

Anyway, the next step is figuring out the investment strategies based on yield curves. The manager needs to decide the percentage allocation of funds across bonds of different maturities. There are various theories around the preferred allocation strategy and broadly they lead to the bullet, barbell and ladder strategies of investing – all funds in a single maturity, funds divided between early and late maturities – nothing in the middle, and funds maturing periodically, respectively. When would one go for the barbell – when the interim curve is anticipated to be flat and hence one hedges the risk between early and late stage. I can elaborate on this later. It could be an entry on its own.

And now we come to VC investment strategies. With recent discussions, the thought has been that VCs are shying away from high risk investments towards those where the revenue stream is validated and stabilised, there is a high visibility on the sales pipeline, and break-even is in sight i.e. a high growth firm where the VC is willing to pay a price to join the gang for a quick, lucrative exit. This would be the quintessential growth investing. High price, small equity share, good (nothing spectacular in terms of the multiple) exit. In fact, the most oft repeated VC words these days seem to be – ‘this is still too early for us’.

However, from the aforementioned article it seemed as if the tilt is more towards the barbell strategy of investing which includes the other half of the VC story i.e. extremely risky early stage investments – they may be very highly disruptive, with a high upside but with low capital intensity and a low burn rate i.e. value investing. The VC focus in this case is in identifying that unrecognized break-through player and getting a large equity share at extremely low prices. There wouldn't be too much competition but the exit, when it happens, will be a high multiple.

However, frankly, I would be interested in seeing what a VC LP memorandum looks like – how wide is the stage of investment. After all, we are moving from very early stage to perhaps even growth stage.

And a very interesting, albeit old blog: http://earlystagevc.typepad.com/earlystagevc/2006/09/vc_20_not_so_se.html

Quantitative easing for dummies

I went for a very interesting session yesterday –the effects of quantitative easing and a zero interest rate policy on the currency markets. Before I get to my key take-ways from the session, here are a few basic inputs.

What is quantitative easing?

Yes, it is the creation of new money. However the manner in which the exercise is undertaken is interesting. It is essentially the open market operations of the central bank i.e. the central bank buying back government bonds from the holders such as banks etc, thus, creating a flow of money in the system. It could also be lending more money to deposit taking institutions or buying assets from banks etc but for the moment we will stick with the first. After all, that is what we are seeing in UK at the moment.

Why does a central bank need to undertake quantitative easing?

When there is a slow down in the economy or even a recession, the first step of an efficient monetary policy would be the reduction of interest rates. This would be aimed at reducing savings and increasing investment and demand. However, in severe cases, the government would reach close to zero interest rates, in which case, interest rate manipulation to ease recessionary impacts in the economy is no longer a tool - which is when QE comes into play.

And now for the some of the highlights from yesterday:

On QE:

· Increasing the supply of money isn’t necessarily a bad thing if inflation is under control and in fact, the central bank is anticipating deflation i.e. evaluate the motivation of the central bank

· To measure the impact on currency, the credibility of the central bank will come into play. With lack of credibility, the money generated will tend to be invested abroad in safer havens and currency will depreciate. However, when central banks are buying gilts, bunds, t-bills in an uncertain environment and there is repatriation of money i.e. banks, FI’s continue to bring their investments home, the government still has credibility and currency will appreciate i.e. monitor the perceived credibility of the central bank

· The impact of QE needs to be considered with a broader macroeconomic perspective - a measure is the CDS spread. If QE makes default seem less likely, CDS spreads will reduce which is a positive for the currency i.e. assess the context in which the central bank is undertaking QE

On ZIRP:

ZIRP may not be a bad policy; it is the anticipated change in the interest rate policy which has an impact on currency movements.

And finally a few examples with some of the interesting points made. I still need to absorb all of this but as I understand it: QE is undertaken not just to stimulate growth and inflation but also to weaken a currency.

New Zealand was quoted as an example of a country which will not undertake QE so as not to weaken the currency any further. Why - because they are a net debtor and not a net creditor. Since they need to fund their current account deficit, the will need to buy fixed income securities of other governments and hence they already have a weakening currency.

The US, on the other hand, has a huge debt deficit but has surplus equity investment. Hence when they undertake quantitative easing, the dollar strengthens.

Japan was another example of a country which has next to zero interest rates and then undertook QE to weaken their currency and stimulate exports.

And finally Switzerland: the best recent example http://www.snb.ch/en/mmr/reference/pre_20090312/source/pre_20090312.en.pdf - an excellent explanation

Multivac

I was about to add to the technocrat's mail yesterday that when talking about virtualization, there has to be a mention of cloud computing - the service driving the adoption of the technology. But then I stopped myself short thinking that perhaps CC is just one small element of the adoption drivers of virtualisation.

And then today morning, I came across an interesting tit-bit of trivia. According to Microsoft (their research chief Rick Rashid), over 20% of the servers sold 'each' year (I guess a trend over the past few years) have been to Yahoo, Microsoft, Google and Amazon. And this is without the widespread adoption of cloud computing. Well, then I wouldn't have been way of the mark in saying that these giants and the trends as we see them developing in CC will drive the technologies and adoption of virtualisation - at a software and a chip level.

As for Multivac, that just may be the final destination. So long as it isn't the Douglas Adam's version of the Supercomputer - Deep thought. I'd like my research results to lead in better directions than a forty-two.

WIMAX, LTE, Fixed, Mobile

I had an interesting insight today. In the constant debate between Wimax and LTE, realised one differentiating factor today - when it comes to developed market installations, its quite possible that WiMAX will be supported by fixed line operators and LTE will be the natural progression path for mobile operators. Fixed operators can use it for the last mile connectivity, last mile backhaul etc. For mobile operators, it would be the technology of choice only in greenfield implementations which are relatively fewer. For example, remote India wherever long distance coverage is needed - there is no fixed network, no mobile network - go WiMAX. (The fixed flavour of Wimax is 802.16d while the mobile version is 802.16e.)
I know there's Sprint Clearwire and their rollouts in Portland. But if you look at the UK market, the hype around the spectrum auction for WiMAX later this year is set to be utilised to the utmost by BT. No mobile presence (T-Mobile and 3 anyone?), lack of WiFi presence as well after the split with The Cloud, hot now cold now position as an MVNO - all factors that speak in favour of a WiMAX launch. But will the financials and market conditions allow it? The markets haven't been too kind to BT of late - their pension liabilities as well as poor performance in Global Services. But that may be made up with positive news from Ofcom on more flexibility for the openreach licensing to competitors.
But coming back to WiMAX and LTE - look at France. They had their auction launch almost two years ago with players like SFR, Neuf (then), TDF, Illiad/Free making the investments in spectrum. However, it seems only 15% of the anticipated installations are live. The failure - the focus on WiMAX replacing fixed connenctivity in remote areas rather than better and faster mobile connections. No - business models focused only on rural areas cant possibly be the answer.
And from an earlier post: http://attemptinglifewithoutdeadlines.blogspot.com/2007/06/new-technologies.html

M&A Implications of the move from content to applications to widgets

Historically, operators have tried to control not only data revenues but also content monetization by enabling easy reach and navigation to content via the mobile idle screen or via their self branded on-device portals. In the former, links to mobile applications and content are provided on the idle screen of the mobile handset providing one-click access to the user. However this space is increasingly giving way to downloads from the handset vendor’s app store (more on this later). In the latter i.e ODPs, a client application resides on the user handset providing access to content whether the user is online or offline. Content is synchronised at regular intervals with the operator’s portal website in line with user preferences.

However, as the availability of open web content tailored for the mobile handset increased, the importance of mobile browsers grew as well. Users have moved away from the boundaries of the operator portal on to the web which is no longer in the domain of the operator. A multitude of browsers are pre-installed on mobile handsets with their own search engines and functionalities.

Operators are gradually coming to the realisation that while they cannot stem the tide of users away from their portals, improving the user experience on the portal will certainly increase its monetisation capability. It can also serve to generate data on user behaviour and consumption patterns leading to a higher bang for the buck in advertising revenues.

One of the added functionalities for operators was to install IM clients within the ODPs to control advertising and the various sources of information that a user would frequently visit. This led to partnerships between ODP and IM vendors rather than cross acquisitions as may have been anticipated (other than Action Engine).

Another feature was to embed a search function within the ODP itself. Via the search engine (e.g. Google search box, Taptu), operators could control the rendering and branding of websites browsed through their network. However, in some cases, operators as well as web-to-mobile content adapters (e.g. Novarra, Infogin) faced a strong backlash from users due to the intrusive and non-relevant branding inserted while navigating the web on the mobile.

Gradually the move is towards embedding widgets within the ODP giving the user the freedom of personalisation. The user can now decide the content, applications and updates they would like to provision within the ODP on their handset. A small icon or widget on the on device portal will launch various websites, feeds etc. However, while ODP vendors like Surfkitchen have launched their own mobile internet platform aimed at providing operators with an application storefront, application launcher and a service creation environment, they do not have the range and ease of widget downloads as provided by an Ikivo or Qualcomm’s Plaza, for example. But will operators be willing to maintain two portals or storefronts to provision internet widgets and mobile content? Or will the integration be initiated by the portal developer? The same holds true for the ad serving platform. Operators like Orange are currently maintaining their own ad server to monetise the content on their portal. Can this be integrated within the services of the on device portal vendor?

Another factor which will structure the direction of integration is security. In the case of the application store, the security of the applications is monitored by the app store vendor. In the case of the operator, the responsibility is distributed. The ODP vendor can only integrate the ability to provision widgets in their platform. However, the widgets will need to be monitored by the operators or the third party provider they outsource the services to e.g. Plaza.

Fig. 1: The Mobile Operator’ Eco-System

These trends also apply to the mobile browser industry. Mobile browsers were traditionally focused on rendering websites for the handset. This area is still seeing a lot of innovation with start-ups like Skyfire not only improving the browsing experience but also allowing web page and page area bookmarking to ease frequent usage. Some search engines such as Taptu are tailored for the usage patterns on the mobile handset. Browser vendors are also increasingly provisioning widgets to be run via the browser which may become the first window of access for the mobile user. The early forerunners are Opera and Access. The aim is to provide users with access to frequently viewed and personalised content with a click. Will this entail integration with a widget serving platform or will the browser loose out between:

- the operator-focused ODP with search engine leading to the web or

- the handset/OS vendor focused application store which is invariably integrated with the in-house browser.

In this entire play, the only performer not mentioned yet is the handset vendor wanting to capture the ubiquitous nature of the mobile in the hands of the user – irrespective of place and presence. The first player to initiate the move into services and applications was Nokia – whether security, mobile wallet, music on the move, location based services, news and a range of other services. This was followed by Apple with their iStore and suddenly there was a storm in the development of third party applications for the mobile handset. Each application is represented by an icon aka widget on the handset idle screen which will launch a run-time instance of the application.

One of the first markets that the handset vendor app store will cannibalise is the idle screen content provisioning by operators.

However, initially, this may be a trend only in the smartphone category. Java phones in developing markets continue to be a target market for idle screen content and applications. To widen the value proposition, idle screen vendors are also upping the ante by providing an ad server platform integrated with their server to capture audiences across the geographies they cover.

In conclusion, there are two main channels of content delivery to the end user – the operator and the handset vendor. The various other players in the eco-system are only easing the delivery of content from the content publisher to the end-user – of content relevant to the user at the right time and the right place. For handset vendors, the selected path is the app store. For mobile operators, it has traditionally been the ODP. But for the ODP to continue to be the answer to the handset vendors app store, it will need to integrate with:

- Mobile application/ widget serving engine or platform providers

- Behaviour monitoring tool providers

- Ad serving platform companies

And these may be the integration trends to look out for.

Mobile Instant Messaging

Overview

Mobile instant messaging is real-time messaging and chatting between two or more people which has extended its presence from the desktop to the mobile environment. The instant messaging client is either embedded on the handset, prior to shipping, or can be downloaded from the service provider’s website. The instant messaging server is installed at the operator end and serves to enable communication and interaction between different instant messaging and presence service domains.

Traditionally, mobile messaging has been defined by text messages which are transmitted over the voice channel itself. The evolution of 3G networks, with high bandwidth availability, is leading it towards rich media messaging where users have much more control over the means through which they can communicate with others.

According to a new study by Forrester Research it is anticipated that the world wide mobile instant messaging (MIM) market will grow from 9m subscribers in 2007 to 66m subscribers in 2011. The European market is expected to grow from 8 percent (26.7 million subscribers) in 2007 to 24 percent (80 million subscribers) by 2013. The report goes on to state that Mobile IM will displace 13 percent of SMS traffic by 2013.

Simultaneously, the study has also attempted to allay the fears of operators stating that text messaging will continue to grow regardless of the increasingly popularity of mobile IM, despite the fact that some traffic will have moved to IM.

Capgemini’s telecommunications, media and entertainment strategy lab predicts that mobile IM revenue is set to reach between €775 million ($1.05 billion) and €800 million ($1.09 billion) by 2012.

The increasing acceptance of mobile instant messaging is being driven by younger users who are familiar with the desktop based IM and want the same level of services even while on the move. This is supported by the availability of higher bandwidths on third generation mobile networks, which is reducing the latency of real time communication driving better performance. The service is further being supported by the increasing number of IM enabled handsets which are now available on the market providing greater freedom of choice.

However, some of the obstacles for mobile IM are the lack of whole-hearted support from mobile operators fearful of loosing out on their cash cow – SMS; multiple protocols used by major IM providers; and the high pricing of operator data plans. Currently there are two business models being evaluated by operators for IM – the first is charging for instant messages along the same lines as a text message; the second is charging for the communication as part of a data transfer plan. Operators are realising increased ARPUs from the higher data transfers associated with IM thus increasing their support for the service. Interoperability has also been a major issue because IM vendors have pushed proprietary protocols that lock users into their IM service rather than support open standards.

The high pricing of operator data plans can be subsidised by mobile advertising and content-in-client models. Given the breadth of the mobile advertising channel, there could be a mix of pricing strategies ranging from cost per thousand for screen based ads, cost per click where fulfillment is via the mobile and cost per action where the mobile channel is used as a response mechanism.

The mobile instant messaging space is increasingly being defined by new players such as third party application developers and ad-networks, which will serve to increase the richness of the user experience on the IM client. A recent partnership between Neustar and Mobinex, demonstrates on-device portal functionality with an IM application. It allows users to access data services such as ringtones, videos etc while in an IM conversation, thus improving the user experience, while allowing for higher revenue generating opportunities for operators. Similarly IM providers and ad networks can also provide personalised and contextual advertising within the IM client in a wide range of options such as banners, product placements or branded information services.

Fig 1: Mobile Instant Messaging Environment

Trends

While operators played an important role in launching IM, increasingly the IM providers are playing a more important role. The user need only log on to the mobile version of the IM service providers website, identify the handset and the operator and download the client to the handset. A stronger penetration by software vendors and IM providers into the space has been seen in the recent acquisition of Danger Inc by Microsoft. Similarly, Google’s acquisition of social networking service provider, Zingku and presence sharing and activity stream provider Jaiku While the operators stand to gain from the data transfer, there is a loss of branding opportunity. Therefore, there is an opportunity for operators to provision integrated messaging platforms with an increased value proposition. One of the means would be to aggregrate the various IM providers enabling a single contact list for the user.