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

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.
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 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 Goodi. 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.
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 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.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.
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 serviceThe 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.
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.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.

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.
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.

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 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.
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

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 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.

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 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.

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.

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.