Reform of the Nigerian VAS Industry: The Good, The Bad & The Ugly – Detail Commercial Solicitors
A. Introduction
A
value added service (VAS) is any service other than voice calls provided over a
mobile network to subscribers. In Nigeria, VAS is big business and the most
popular VAS is probably caller ring back tunes. The Nigerian VAS industry,
estimated to be worth $200 million in 2014, now has a value of $1 billion. Due
to rapidly declining average revenue per user for voice calls, which since 2004
has decreased from just over $15 per month per subscriber to a new low of $4
due to the current economic crisis, mobile network operators (MNO) have
increased efforts to generate revenue through VAS.
value added service (VAS) is any service other than voice calls provided over a
mobile network to subscribers. In Nigeria, VAS is big business and the most
popular VAS is probably caller ring back tunes. The Nigerian VAS industry,
estimated to be worth $200 million in 2014, now has a value of $1 billion. Due
to rapidly declining average revenue per user for voice calls, which since 2004
has decreased from just over $15 per month per subscriber to a new low of $4
due to the current economic crisis, mobile network operators (MNO) have
increased efforts to generate revenue through VAS.
Since
MNOs control the gateway to subscribers, they currently take the lion’s share
of revenue generated in the VAS ecosystem, which includes content providers,
and VAS providers (VASP) licensed by the Nigerian Communications Commission (NCC).
This has led to disgruntlement, particularly among content providers, who have
been lobbying the NCC to intervene for some time.
MNOs control the gateway to subscribers, they currently take the lion’s share
of revenue generated in the VAS ecosystem, which includes content providers,
and VAS providers (VASP) licensed by the Nigerian Communications Commission (NCC).
This has led to disgruntlement, particularly among content providers, who have
been lobbying the NCC to intervene for some time.
In
March 2016, the NCC issued a consultation paper on Procedures and Guidelines
for the Provision of VAS in Nigeria, a new framework for the VAS industry
which seeks to address the above issue. Officially though, the reasons cited
for the review of the current regulatory framework were the numerous complaints
received by the NCC relating to unsolicited VAS marketing messages, the use of
short codes for fraudulent purposes, and anti-competitive practices.
Furthermore, the VAS market is approaching maturity, according to the NCC.
Therefore, this new framework is intended to stimulate growth and innovation in
the market.
March 2016, the NCC issued a consultation paper on Procedures and Guidelines
for the Provision of VAS in Nigeria, a new framework for the VAS industry
which seeks to address the above issue. Officially though, the reasons cited
for the review of the current regulatory framework were the numerous complaints
received by the NCC relating to unsolicited VAS marketing messages, the use of
short codes for fraudulent purposes, and anti-competitive practices.
Furthermore, the VAS market is approaching maturity, according to the NCC.
Therefore, this new framework is intended to stimulate growth and innovation in
the market.
The NCC issued the existing regulatory framework – The License Framework for
Value Added Services – in April 2011. The main objective of the existing
framework was to implement appropriate safeguards for the use of VAS and the
approach there was one of light-touch regulation. The proposed framework
is a big departure from the existing framework, however it is a mixed bag of
good, bad and ugly. The good is that the NCC is taking a more holistic approach
to regulation of the industry and is making clear attempts to increase consumer
protection and ensure a fairer revenue allocation within the value chain.
However, the framework contains a few ambiguities and in parts is currently
lacking the detail required to implement it effectively. That is the bad. The
ugly is the level of additional regulation, which is going to increase the cost
of doing business for market players and ultimately may discourage new entrants
to the market. The framework may also encourage a new concentration of power in
the hands of a few, which is also an issue. In this article, we discuss each of
these aspects in turn.
B. The Good
i.
The NCC’s
holistic approach to regulation
The NCC’s
holistic approach to regulation
In the existing framework, there is some recognition
of the roles of the different market players – VASPs, application providers,
VAS aggregators, and MNOs, however the focus was entirely on VASPs. Under the
proposed framework, the NCC recognises these roles and redefines them so that
each player understands its responsibilities and obligations in the market.
of the roles of the different market players – VASPs, application providers,
VAS aggregators, and MNOs, however the focus was entirely on VASPs. Under the
proposed framework, the NCC recognises these roles and redefines them so that
each player understands its responsibilities and obligations in the market.
Therefore, going forward the VAS value chain will be
divided into three segments, each comprised of VAS & Content Developers (Developers),
VAS Hosting Service Providers (VHSP) and MNOs. Developers will own the content
and applications provided to subscribers through platforms owned by VHSPs. The
VHSPs will also provide transmission links to the networks of the MNOs, which
provide access to subscribers.
divided into three segments, each comprised of VAS & Content Developers (Developers),
VAS Hosting Service Providers (VHSP) and MNOs. Developers will own the content
and applications provided to subscribers through platforms owned by VHSPs. The
VHSPs will also provide transmission links to the networks of the MNOs, which
provide access to subscribers.
However, certain VAS will be reserved for MNO because they are either network
dependent or best provided by MNOs. These are ring tones, caller ring back
tunes and cell-ID location based VAS. Players are otherwise free to achieve
vertical integration, that is operate in more than one segment of the market
provided that an MNO, intending to expand to VAS development, must incorporate
a subsidiary with separate accounting and governance for this purpose and must
connect to networks through a VHSP. VHSPs that wish to operate in other
segments must maintain a separate account for each line of business.
ii Increased Consumer Protection
The existing VAS framework focuses almost entirely
on consumer protection, however the proposed framework goes much further in
terms of the quality of content and service requirements, regulation of
marketing messages and anti-competitive practices.
on consumer protection, however the proposed framework goes much further in
terms of the quality of content and service requirements, regulation of
marketing messages and anti-competitive practices.
a) Promoting competition in the market
Promotion of competition in the market is a strong
theme of the proposed framework. Strong competition encourages innovation,
drives a higher quality of service, and ultimately may lead to lower prices. As
stated above, MNOs will be prevented from operating as Developers unless they
incorporate a subsidiary for this purpose. Most importantly, this subsidiary
will be required to connect to the networks through a VHSP like any other
Developer. The potential for MNOs, with their deeper pockets, to eliminate
competition from small Developers is evident and this is what the NCC is trying
to prevent.
theme of the proposed framework. Strong competition encourages innovation,
drives a higher quality of service, and ultimately may lead to lower prices. As
stated above, MNOs will be prevented from operating as Developers unless they
incorporate a subsidiary for this purpose. Most importantly, this subsidiary
will be required to connect to the networks through a VHSP like any other
Developer. The potential for MNOs, with their deeper pockets, to eliminate
competition from small Developers is evident and this is what the NCC is trying
to prevent.
The NCC will be able to prevent vertical integration in the market to preserve
or promote competition. Market rules will be implemented to curb abuse of
market power and other anti-competitive practices. A large section of the new
VHSP licence is dedicated to such practices which will be prohibited going
forward. These include cross-subsidisation, which is where a VHSP
vertically-integrated with a Developer charges an excessive price for its
hosting and transmission services to other Developers and either charges its
own Developer a lower fee for the same services, or sets the price of the
content produced by its Developer so low to gain an advantage within the
market. Other banned practices are the formation of cartels to fix prices,
discriminatory pricing and predatory pricing, where a VHSP sets the price of
its services below cost to eliminate the competition. Also, the NCC has not
ruled out the possibility of regulating prices charged to subscribers if
consumer protection so requires.
b) Quality of content and service
The quality of content (QoC) and quality of service
(QoS) requirements under the existing framework are limited to obligations on
VASPs to implement measures to ensure that VAS transmitted contains no sexually
suggestive or explicit material, and to comply with the 2012 Quality of Service
Regulations (QoSR). The problem is that the targets and key performance
indicators (KPIs) in the QoSR were formulated mostly for voice calls and data
services provided by MNOs. The VAS KPIs subsequently formulated by the NCC only
addresses delivery failures, incorrect feedback and multiple billing, all by
SMS and MMS, whereas VAS may be transmitted through other bearers including
interactive voice response (IVR) and unstructured supplementary service data (USSD).
These issues are addressed to some degree in the proposed framework.
(QoS) requirements under the existing framework are limited to obligations on
VASPs to implement measures to ensure that VAS transmitted contains no sexually
suggestive or explicit material, and to comply with the 2012 Quality of Service
Regulations (QoSR). The problem is that the targets and key performance
indicators (KPIs) in the QoSR were formulated mostly for voice calls and data
services provided by MNOs. The VAS KPIs subsequently formulated by the NCC only
addresses delivery failures, incorrect feedback and multiple billing, all by
SMS and MMS, whereas VAS may be transmitted through other bearers including
interactive voice response (IVR) and unstructured supplementary service data (USSD).
These issues are addressed to some degree in the proposed framework.
Content that is unethical, inciting or illegal will
not be permitted. Content must also be of acceptable quality, accurate and of
good legal standing. The proposed framework sets out minimum QoS technical
standards to be met by VHSPs and MNOs relating to bit error rate, access or
login time, download speed, maximum processor loads and dropped access. The NCC
also sets minimum performance specifications for VHSPs. These relate to the
memory capacity of a VHSP’s platform, the VHSP’s transmission bandwidth, its
traffic-handling capacities including number of concurrent users, transactions
per second, and applications that it can host. Finally, the NCC imposes a
minimum availability of service of 99% on the VHSPs.
not be permitted. Content must also be of acceptable quality, accurate and of
good legal standing. The proposed framework sets out minimum QoS technical
standards to be met by VHSPs and MNOs relating to bit error rate, access or
login time, download speed, maximum processor loads and dropped access. The NCC
also sets minimum performance specifications for VHSPs. These relate to the
memory capacity of a VHSP’s platform, the VHSP’s transmission bandwidth, its
traffic-handling capacities including number of concurrent users, transactions
per second, and applications that it can host. Finally, the NCC imposes a
minimum availability of service of 99% on the VHSPs.
c) Curbing unsolicited marketing messages and mis-use of bulk messaging
Nigerian subscribers are inundated with unsolicited marketing messages daily
and complaints have been made to the NCC for years. MNOs point the finger at
VASPs for the unwanted messages.
Under the proposed framework, MNOs and VHSPs will be jointly responsible for
curbing the practice. Also, unsolicited marketing messages may only be sent as
an end-of-call notification. They may no longer be made by SMS, IVR, voice
calls or those vexing recorded messages. Any subscriber that gives a do not
disturb notice cannot be sent any marketing in any form.
MNOs are prohibited from routing traffic or sending
content from any short code or directory number which has not been issued by or
on behalf of the NCC. They are also enjoined from switching any messages which
do not contain the registered telephone number of the sender, and in the case
of bulk messages, the identity of the VHSP sending them. MNOs and VHSPs are
encouraged to implement technical measures to detect and block spam messages,
though ultimately it is the VHSP that will be liable for any scams, and illegal
or subversive messages sent via its bulk SMS platform.
content from any short code or directory number which has not been issued by or
on behalf of the NCC. They are also enjoined from switching any messages which
do not contain the registered telephone number of the sender, and in the case
of bulk messages, the identity of the VHSP sending them. MNOs and VHSPs are
encouraged to implement technical measures to detect and block spam messages,
though ultimately it is the VHSP that will be liable for any scams, and illegal
or subversive messages sent via its bulk SMS platform.
iii. Fairer Revenue Allocation
The predominant distribution model in the VAS
industry at present is based on revenue share. As gatekeepers to the market,
MNOs reserve for themselves a high percentage of revenues. This can range
between 60% and 95% depending on the type of content and the channel of
distribution (SMS, MMS, IVR, USSD) used. This leaves a small amount to be
shared between the VASP and content provider. For certain content industries,
particularly music, which are heavily dependent on VAS to distribute their
content, the situation is untenable.
industry at present is based on revenue share. As gatekeepers to the market,
MNOs reserve for themselves a high percentage of revenues. This can range
between 60% and 95% depending on the type of content and the channel of
distribution (SMS, MMS, IVR, USSD) used. This leaves a small amount to be
shared between the VASP and content provider. For certain content industries,
particularly music, which are heavily dependent on VAS to distribute their
content, the situation is untenable.
In the new framework, the NCC proposes to separate the transport cost from
the product cost and selling price of VAS. The transport cost is
the cost of airtime or data for subscriber messages to the VHSP server and the
transport of the VAS to the subscriber, whereas the product cost is the
cost of developing the VAS, while the selling price is the product cost
plus costs of hosting, distribution, branding and advertising, and bill
collections and accounting. The transport and product costs will be allocated
exclusively to the MNOs and Developers respectively. The other components of
the selling price may be allocated to the VHSP as agreed with the Developer.
Each component of the selling price has a weighting
based on international benchmarks. Product cost is 40%, hosting and
distribution costs are 20% and 10% respectively, while branding &
advertising and bill collections & accounting are each 15%. This means that
in the future, Developers may retain between 40% and 70% of the selling price
while the VHSPs’ share may range between 30% and 60%. If the VAS is paid for
through an MNO’s airtime and billing systems, the MNO will keep 15% of the selling
price in addition to the transport cost. However, these weightings serve as a
guide, which the parties can contract out of. If the parties fail to agree the
weighting, or a party so requests, the NCC may intervene. This may prove to be
an invaluable recourse for content providers outmatched by an MNO with stronger
bargaining power.
based on international benchmarks. Product cost is 40%, hosting and
distribution costs are 20% and 10% respectively, while branding &
advertising and bill collections & accounting are each 15%. This means that
in the future, Developers may retain between 40% and 70% of the selling price
while the VHSPs’ share may range between 30% and 60%. If the VAS is paid for
through an MNO’s airtime and billing systems, the MNO will keep 15% of the selling
price in addition to the transport cost. However, these weightings serve as a
guide, which the parties can contract out of. If the parties fail to agree the
weighting, or a party so requests, the NCC may intervene. This may prove to be
an invaluable recourse for content providers outmatched by an MNO with stronger
bargaining power.
C. The Bad
Now that we have been through the good, we can
discuss the issues with the proposed framework.
discuss the issues with the proposed framework.
i. Riddled with Ambiguities
The first is that as currently drafted the framework
is riddled with ambiguities. For example, the QoC requirements are open to
various interpretations. It is unclear what “inciting” content or content of
“good legal standing” is, and by whose standard will unethical content be
judged. The framework describes accurate content and applications as content
which is free of default, bugs and inaccuracies. However, no technology is ever
guaranteed to be free of errors or run uninterrupted. System crashes are
inevitable. Also, facts which are considered accurate today may, by a
significant change of opinion, be considered inaccurate tomorrow. Therefore,
stating that content should be capable of substantiation at the time of
publication would be preferable.
is riddled with ambiguities. For example, the QoC requirements are open to
various interpretations. It is unclear what “inciting” content or content of
“good legal standing” is, and by whose standard will unethical content be
judged. The framework describes accurate content and applications as content
which is free of default, bugs and inaccuracies. However, no technology is ever
guaranteed to be free of errors or run uninterrupted. System crashes are
inevitable. Also, facts which are considered accurate today may, by a
significant change of opinion, be considered inaccurate tomorrow. Therefore,
stating that content should be capable of substantiation at the time of
publication would be preferable.
Even more confusing is where the framework provides that Developers and VHSP
may be required to refund subscribers where the VAS provided is faulty or
inaccurate and “a clear case of negligence is established.” The
reference to negligence is unhelpful here since it is for the NCC to set the
standards rather than rely on the general standard of care of negligence. Also
it is unclear whether negligence is to be established by the subscribers in a
court of law or the NCC before a refund may be claimed. If subscribers must go
to court before receiving a refund, it is unlikely any refunds will be made as
the time and expense of litigation will far outweigh the compensation to be
obtained.
Two of the QoS standards are particularly vague. The bit error rate must be
such that it “will not introduce noticeable degradation in the quality of
the message” and download speed should be “high enough to avoid
subscriber apathy.” Furthermore, the VAS availability standard of 99% is
set without a definition or method of calculating availability. For the VAS to
be considered unavailable, must there be a complete system failure or must a
percentage of subscribers experience performance issues? When calculating
downtime, do VHSPs exclude downtime for scheduled maintenance and force
majeure? All these make a difference to the level of availability in real
time.
ii.
A Non-Definitive
Guide
A Non-Definitive
Guide
The second issue with the framework is that it is
non-definitive. The details of quite a few aspects are to be confirmed.
non-definitive. The details of quite a few aspects are to be confirmed.
For instance, most of the provisions relating to competition are to be fleshed
out in market rules. This is to be expected since conducting a market study and
devising competition-based rules is a complex task which is likely to take
several months. That said, the uncertainty may discourage investments,
particularly by current players looking to expand to other segments of the
market. They may take the view that it is prudent to wait for the market rules
rather than invest now and later be required to divest their holdings under the
rules.
Other details which will be confirmed include the short code plan which will
prescribe the procedure for allocation of short codes to VHSPs. In the future,
short codes will be allocated to VHSPs which in turn allocate them to
Developers. Also, all operator USSD codes for accessing basic customer services
are to be harmonised across all networks. The details of this will be published
when the industry working group on short codes releases its recommendations.
In both the existing and proposed frameworks, market players are requested to
implement a code of conduct for the provision of VAS without more. Neither
framework contains a deadline by which the code should be implemented or
consequences of failure to implement the code, which is probably why no code
has been implemented to date. In other jurisdictions, the threat of additional
regulation, if a code is not implemented by a certain date is usually
sufficient encouragement for the industry to implement a code.
A key aspect missing from the framework are the
sanctions applicable for breach of the obligations imposed on the players. For
example, there are no sanctions prescribed for breach of the rules on bulk
messaging and unsolicited marketing. Note that the existing VAS framework does
prohibit sending unsolicited messages and spam. Therefore, the current
marketing malpractice was not brought about by a lack of regulation, rather it
was a lack of enforcement, and this aspect is not yet addressed in the proposed
framework.
sanctions applicable for breach of the obligations imposed on the players. For
example, there are no sanctions prescribed for breach of the rules on bulk
messaging and unsolicited marketing. Note that the existing VAS framework does
prohibit sending unsolicited messages and spam. Therefore, the current
marketing malpractice was not brought about by a lack of regulation, rather it
was a lack of enforcement, and this aspect is not yet addressed in the proposed
framework.
D. The Ugly
The issues described above are actually of less
concern than the additional red tape that the NCC intends to introduce and the
new oligopoly that may result from the new licensing regime.
concern than the additional red tape that the NCC intends to introduce and the
new oligopoly that may result from the new licensing regime.
i. More red tape
There is a requirement that Developers be registered
as a body corporate, which is unduly restrictive. While many creatives
incorporate companies as a vehicle to run their affairs, many operate as
partnerships or individuals under a business name. Then, VHSPs will be required
to submit licence agreements with Developers to the NCC for approval. It is not
evident what purpose the approval of such agreements would serve, and this
appears to be regulation for regulation’s sake. However, the most
flagrant instance of this is the creation of a class licence for Developers.
The details of the Developer class licence are yet to be confirmed. However,
the idea alone has been met with strong resistance from industry players, such
as the Wireless Application Service Providers Association of Nigeria.
Introducing this class licence goes against the line that the NCC has taken in
the past which is that the NCC does not licence or regulate technology. The
class licence will therefore be an additional barrier to entry to the market
for Developers.
as a body corporate, which is unduly restrictive. While many creatives
incorporate companies as a vehicle to run their affairs, many operate as
partnerships or individuals under a business name. Then, VHSPs will be required
to submit licence agreements with Developers to the NCC for approval. It is not
evident what purpose the approval of such agreements would serve, and this
appears to be regulation for regulation’s sake. However, the most
flagrant instance of this is the creation of a class licence for Developers.
The details of the Developer class licence are yet to be confirmed. However,
the idea alone has been met with strong resistance from industry players, such
as the Wireless Application Service Providers Association of Nigeria.
Introducing this class licence goes against the line that the NCC has taken in
the past which is that the NCC does not licence or regulate technology. The
class licence will therefore be an additional barrier to entry to the market
for Developers.
ii. The Potential for a New Oligopoly
VASPs are most fearful that having succeeded in
wresting power from the MNOs through the separation of transport cost from the
VAS selling price under the proposed framework, some of the other changes in
the framework will give rise to a new oligopoly at the VHSP level. It is
reported that the VHSP licence fee will be ₦10 million for a five-year licence. VASPs have
complained that at ₦2 million a year this is prohibitively high, and
fear that many of them may be unable to obtain a VHSP licence and instead will
be relegated to Developer status. Therefore, only a few will be able to obtain
the licence. This, coupled with the fact that VHSPs will be the gatekeepers to
the MNOs’ networks and responsible for allocating short codes to Developers
going forward, may lead to a new concentration of power akin to that of the
MNOs, which goes against the pro-competition objective of the reforms.
wresting power from the MNOs through the separation of transport cost from the
VAS selling price under the proposed framework, some of the other changes in
the framework will give rise to a new oligopoly at the VHSP level. It is
reported that the VHSP licence fee will be ₦10 million for a five-year licence. VASPs have
complained that at ₦2 million a year this is prohibitively high, and
fear that many of them may be unable to obtain a VHSP licence and instead will
be relegated to Developer status. Therefore, only a few will be able to obtain
the licence. This, coupled with the fact that VHSPs will be the gatekeepers to
the MNOs’ networks and responsible for allocating short codes to Developers
going forward, may lead to a new concentration of power akin to that of the
MNOs, which goes against the pro-competition objective of the reforms.
E. The Way Ahead
Despite the shortcomings of the proposed framework,
the NCC is to be lauded for finally intervening in the market and attempting to
address the various imbalances and malpractice. However, the NCC must remain
mindful that its two main functions are first the facilitation of investments
in the Nigerian communications industry and second the protection of consumers.
Over-regulation will discourage investments and competition, therefore a
balance must be struck. We agree with industry players that further
consultation must be undertaken prior to finalising the framework, in order to
address its shortcomings in a manner which fulfils the NCC’s mandate. The
consultation paper is available here.
the NCC is to be lauded for finally intervening in the market and attempting to
address the various imbalances and malpractice. However, the NCC must remain
mindful that its two main functions are first the facilitation of investments
in the Nigerian communications industry and second the protection of consumers.
Over-regulation will discourage investments and competition, therefore a
balance must be struck. We agree with industry players that further
consultation must be undertaken prior to finalising the framework, in order to
address its shortcomings in a manner which fulfils the NCC’s mandate. The
consultation paper is available here.
Detail
Commercial Solicitors is distinct as Nigeria’s first commercial solicitor firm
to specialize exclusively in non-courtroom practice. Based in Lagos, Nigeria’s
business capital, DETAIL is totally committed to its clients’ business
objectives and reputed for dealing with the minutiae. Email: info@detailsolicitors.com
Commercial Solicitors is distinct as Nigeria’s first commercial solicitor firm
to specialize exclusively in non-courtroom practice. Based in Lagos, Nigeria’s
business capital, DETAIL is totally committed to its clients’ business
objectives and reputed for dealing with the minutiae. Email: info@detailsolicitors.com
Ed’s Note – This article was originally
published here.
published here.