Why is the CICT abandoning the Moblie Application Developers?

In this IT Matters report (which I chanced upon in Migs Paraz’s blog), CICT Chair Virgilio Pena declared his commission will have a hands-off policy with respect to the problems faced by local mobile applications developers vis-a-vis the onerous business arrangements imposed upon them by the dominant mobile phone companies, the “Cellcos”. 

He added that the government should not interfere in the profit sharing scheme through regulation.

Mr. Pena’s indifference to this sector is distressing because this industry creates significant value-added in the ICT sector and has the potential to compete in the global market if it can get out from under the thumb the Cellcos.  CICT should protect this industry and promote it with the same vigor as the low-value-added call center industry.  CICT should intervene and break this market failure.  There is absolutely no reason to take a hands-off policy that benefits the Cellcos. 

Here’s the problem: Mobile application developers provide services to the general public through the Cellcos’ SMS and MMS network.  Some make ringtones while others route SMS to your email and back.  With over 1 billion SMS/MMS messages routed in this country every 9 to 10 days or so, Philippine mobile application developers have a unique opportunity to test their services upon a large market, make some money and then offer their services to the rest of the world.  However, few of these companies have been able to do so.  The reason is simple,  the Cellcos have imposed onerous business conditions upon these mobile application developers which are designed to maximize the Cellcos’ profits at the expense of these developers.

These onerous provisions are as follows: 

(a)  A 70-30 revenue share where 70% of the P2.50 charged to the customer goes to the Cellco.  This means that every time you send a text to someone on the Chikka network, only 75 centavos goes to Chikka.  The rest (of P1.75) goes to the Cellco.

(b)  A year-to-year contract where the Cellco has the right not to renew the application developer’s contract.  A year-to-year contract also allows the Cellcos to have greater bargaining leverage because mobile application developers are not likely to recover their investments in one year.  Plus, if the application developer displeases the Cellco in any way, their contract is simply not renewed — no questions asked, no rights violated. 

(c)  Access to the network depends upon the sole discretion of the Cellcos. This means that even if you have the best mobile application idea, you can’t get it to work without the Cellco’s consent.  I’ve spoken to many application developers who have pitched their ideas to the Cellcos only to be turned down for no apparent reason.  Months later, the Cellco launches a similar service.  Of course, there’s no law against idea theft and one can’t ever prove that the Cellco’s didn’t act improperly.

These three (3) contractual issues have kept the industry from growing and flourishing. A 70-30 share keeps the industry poor and removes much of the incentive to innovate. A year-to-year contract allows the Cellco the legal right to shut them down without compensation or consequence.  Control over network access allows the Cellcos to listen to anyone with an idea and later, do it for themselves.  If this isn’t a market failure that needs to be addressed by the CICT, I don’t know what is.

Incredibly, to solve this problem, Mr. Pena has this to say:

Mr. Peña said enhancing their service offers will boost their bargaining power in getting bigger profit share from their network partners.

That just doesn’t make any sense.  Even if I developed the best mobile application, it gives me no bargaining leverage.  The Cellcos can still impose their onerous conditions on me because they can deny me access to their network.  As pointed out by Migs, this isn’t the Internet.  It’s not an open network.  This is why competition is being stifled because network power is centered upon the Cellcos who have wielded it in a way that has made the mobile application industry unable to grow.  It has also permitted the Cellcos to take the lion’s share of the revenues generated by this industry. 

Mr. Pena’s advice continues in this way:

Providers should go beyond their staple offers and start developing applications on e-learning and gaming or other services that will be regularly needed by the market.

Well, I have a client who developed a game for Java phones and even though they were willing to accept the onerous conditions above, they were unable to get a signed contract.  So, the assertion of Mr. Pena is false. If you build it, they won’t come — not because the service is bad but because the service won’t get launched without a Cellco contract.  There’s no way around that.

Building better services can’t do it, Mr. Pena.  CICT and the NTC have to get involved and intervene if only to promote competition in this space.  I urge you to investigate the manner in which the Cellcos have conducted themselves in this space.  The local mobile application developers who have contracts with the Cellcos are too afraid to talk to you openly — not when the Cellcos hold a sword over their heads.  The CICT needs to dig deeper and get its head out of the sand. 

If the CICT refuses to act in these situations where government intervention is necessary,  then Mr. Pena should do a better job at articulating the reasons behind such a policy decision. Otherwise, the CICT may be accused of coddling the Cellcos at the expense of the SMEs which the CICT claims to promote.