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Reform of the Nigerian VAS Industry: The Good, The Bad & The Ugly

September 2016 Newsletter

A. Introduction

A value added service (VAS) is any service other than

voice calls provided over a mobile network to subscrib-

ers. 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 econom-

ic 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.

In March 2016, the NCC issued a consultation paper on

Procedures and Guidelines for the Provision of VAS in Nige-

ria, 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 relat-

ing 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 innova-

tion 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 frame-

work 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 in-

dustry and is making clear attempts to increase

consumer protection and ensure a fairer reve-

nue 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 go-

ing 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 pow-

er in the hands of a few, which is also an issue. In

this article, we discuss each of these aspects in

turn.

Detail Commercial Solicitors

Value added services. Image courtesy huawei.com

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B. The Good

i. The NCC’s holistic approach to regulation

In the existing framework, there is some recognition of the roles of the different market players – VASPs, appli-cation providers, VAS aggregators, and MNOs, however the focus was entirely on VASPs. Under the proposed framework, the NCC recognises these roles and rede-fines them so that each player understands its respon-sibilities 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.

However, certain VAS will be reserved for MNO be-cause they are either network dependent or best pro-vided by MNOs. These are ring tones, caller ring back tunes and cell-ID location based VAS. Players are other-wise 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 account-ing and governance for this purpose and must connect to networks through a VHSP. VHSPs that wish to oper-ate in other segments must maintain a separate ac-count for each line of business.

ii Increased Consumer Protection

The existing VAS framework focuses almost entirely on

consumer protection, however the proposed frame-

work goes much further in terms of the quality of con-

tent 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 ser-

vice, and ultimately may lead to lower prices. As stated

above, MNOs will be prevented from operating as De-

velopers unless they incorporate a subsidiary for this

purpose. Most importantly, this subsidiary will be re-

quired 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 integra-

tion in the market to preserve or promote compe-

tition. 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 verti-

cally-integrated with a Developer charges an ex-

cessive price for its hosting and transmission ser-

vices 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 competi-

tion. Also, the NCC has not ruled out the possibil-

ity 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 ser-

vice (QoS) requirements under the existing

framework are limited to obligations on VASPs to

implement measures to ensure that VAS trans-

mitted 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, incor-

rect feedback and multiple billing, all by SMS and

MMS, whereas VAS may be transmitted through

other bearers including interactive voice re-

sponse (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 ac-

ceptable quality, accurate and of good legal

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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 mes-sages. 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.

iii. Fairer Revenue Allocation

The predominant distribution model in the VAS indus-

try at present is based on revenue share. As gatekeep-

ers 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 indus-

tries, particularly music, which are heavily dependent

on VAS to distribute their content, the situation is un-

tenable.

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, distribu-

tion, 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 & ac-

counting 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 par-

ties 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 invalua-

ble 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.

i. Riddled with Ambiguities

The first is that as currently drafted the frame-

work is riddled with ambiguities. For example,

the QoC requirements are open to various inter-

pretations. 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 appli-

cations as content which is free of default, bugs

and inaccuracies. However, no technology is ever

guaranteed to be free of errors or run.

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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 inaccu-

rate 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 sub-

scribers 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 out-

weigh 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 perfor-

mance 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

The second issue with the framework is that it is non-

definitive. The details of quite a few aspects are to be

confirmed.

For instance, most of the provisions relating to compe-

tition 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 like-

ly 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 proce-

dure 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 cus-

tomer 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 conse-

quences of failure to implement the code, which

is probably why no code has been implemented

to date. In other jurisdictions, the threat of addi-

tional 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. There-

fore, 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 .

i. More red tape

There is a requirement that Developers be regis-

tered as a body corporate, which is unduly re-

strictive. While many creatives incorporate

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companies as a vehicle to run their affairs, many oper-ate 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 agree-ments would serve, and this appears to be regulation for regulation’s sake. However, the most flagrant in-stance of this is the creation of a class licence for Devel-opers. 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 wrest-ing 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 com-plained that at ₦2 million a year this is prohibitively high, and fear that many of them may be unable to ob-tain a VHSP licence and instead will be relegated to De-veloper status. Therefore, only a few will be able to ob-tain the licence. This, coupled with the fact that VHSPs will be the gatekeepers to the MNOs’ networks and re-sponsible for allocating short codes to Developers go-ing 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 frame-

work, the NCC is to be lauded for finally interven-

ing in the market and attempting to address the

various imbalances and malpractice. However, the

NCC must remain mindful that its two main func-

tions are first the facilitation of investments in the

Nigerian communications industry and second the

protection of consumers. Over-regulation will dis-

courage investments and competition, therefore a

balance must be struck. We agree with industry

players that further consultation must be under-

taken 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.

VAS Applications. Image courtesy huawei.com

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