MOBILE PHONE CHAT ROOM ATTRACTING 20,000 USERS A WEEK

Telecoms

"I'm a 24-year-old trapped in a 47-year-old's body," declares Herman Heunis. But he can escape the trap. Armed with a cellphone equipped with his software, he is one of the 1,85m young South Africans who use MXit, Heunis's pioneering technology.

  In its virtual world, his body is no barrier. Messages rocket between users at almost no cost. Chat rooms thrive with lively, 24-hour conversations. What had previously been possible only on PCs, Heunis has made available to anyone with a cellphone.

Back in the physical world, Heunis covers his excitement with a veneer of reserve as each day proves he has hit on a winning technology. Next door to his office in the corner of a drab Stellenbosch office park, his team of 16 programmers and support staff monitor downloads from servers hosted in Cape Town. They are heartened by the numbers: the rate has spiked to 20,000 since they launched version 5.0 last week.

Most of them are relieved to have reached a plateau after development costs drove the business close to bankruptcy. But there is also a sense of much bigger things to come. Heunis wants a world filled with MXit within the next three years: 50m users around the globe chatting - in text - on their cellphones.

Like most disruptive technologies, MXit happened almost by chance. Heunis spent years, and millions of rand, trying to develop a multiplayer online game for cellphones, but the high cost of communicating with other players made it unfeasible. MXit emerged out of the solution to that problem. Instead of using SMS or voice technology, Heunis would use the cellphone networks' (much cheaper) data capacity. The model was pioneered for online PCs by ICQ in the mid-1990s. PC users could exchange messages with one another instantly, so carrying on a conversation.

Heunis saw the potential for a similar service on cellphones that could connect to the Internet. GPRS - a type of cellphone data network - made that possible. In May last year, the first version of MXit was launched.

For Heunis and his team, it hasn't been an easy ride. Shortly after launching, the company was burning up cash. "It's not easy if you keep on spending money and keep on promising some return on investment in the future," he says.

The costs of developing MXit, while a fraction of what a large IT concern would spend, nearly bankrupted him. Two months after its launch, Heunis called the MXit team together and explained the precarious financial situation to them. "We had to invest in new servers every month and our bandwidth costs went up every month and we had to employ more staff and more and more money was flowing out of fragile bank accounts." But his team stuck with it, despite knowing it could have been a financial disaster. Now, Heunis likes to recite Dire Straits' "Why worry", particularly the words "sunshine after the rain".

MXit has been profitable for the past two months - "a small profit" is all he will tell us - but its potential is becoming obvious. Like most online tech innovations, MXit had to start by attracting the users. Cash comes later.

Like Google once had to, MXit is just now figuring out how to make money, confident that its technology is a winner. To see that, consider the technical barriers MXit had to knock down.

It works to link cellphones not just with each other but also with PCs via different PC-based messenger applications like ICQ, Google Talk and MSN Messenger. Instant messaging has become ubiquitous in the PC world. Users log in to see which of their contacts are online and chat to them with short messages, instantly relayed to other users' screens.

MXit uses its own software system to guide communication from other MXit-enabled phones over the cellphone networks. It has also designed software that translates MXit into the various PC-based messenger applications. MXit is easy to install, requiring cellphone users to download and install a small application. They then load up their contacts' cellphone numbers as well as the contact details for people using any of the supported PC-based messenger applications.

By opening MXit on their phones, they can then see when their friends are online and communicate with them by typing messages to them, much like they would using SMS. They can also exchange photos and other files.

But the main drawcard is price. Because MXit uses the cellphone operators' GPRS and 3G data infrastructure, users send messages that cost just a fraction of a cent. Compare that with SMS rates of 40c-80c a message and it's little wonder that children, in particular, are flocking to the service. They can have long conversations with their friends and pay, at most, a couple of cents.

The pricing takes advantage of the fact that, while SA's SMS and call rates are high, data rates of R2/MB (and less) are globally competitive.

The modest revenue figures to date have been earned by charging small sums to users to access chat rooms, virtual dating, news and other content and subscription services such as ringtone downloads. Cash is collected through premium-rate SMSs - users credit their "moola" accounts by sending an SMS to MXit. The cellphone networks also get a bite of this revenue.

But MXit is only just starting to tap into the advertising market, which should form a natural revenue stream.

Each of the 4,8m times that users collectively log in to MXit a day, they could be exposed to an ad on MXit's opening splash screen. MXit is in talks with a number of potential advertisers, particularly youth brands.

The long-term payoff for Heunis may come not from the profits of MXit Lifestyle - the operating company - but from a sale of the business. MXit could attract the attention of a Google, Yahoo or Microsoft, interested in expanding their instant messaging services onto mobile phones. The company could even become the target of local or foreign cellular network operators. It wouldn't be the first time a small Cape company had done it - Mark Shuttleworth sold his online security company, Thawte, to US-based Verisign for US$575m in 2000.

But Heunis says he doesn't want to sell. "I can't see us selling now. We've only just started. There's still so much to be done." But, he adds, "if someone comes along with an outrageous offer, we might think about it, with the emphasis on might".

The offers could well get "outrageous", as Heunis puts it, if MXit delivers on its extensive growth plans, which spread far beyond SA's borders. Any market with the right combination of high SMS and voice prices and low data prices is a natural place for MXit to thrive. Already, 150 000 international users have downloaded the application, despite no promotion or customised software.

The potential is huge - there are twice as many cellphone users globally than Internet users. Heunis says that within the next three years he wants 40m-50m international users, on top of 4m-5m locally. It sounds like a lot, but it's only 2,5% of the global cellphone market. "We try to be conservative," Heunis says. "We'd rather say 40m and get 40m than target 100m and fail."

But a major challenge to MXit's growth ambitions is getting around Telkom's bandwidth fees. Though it's technically feasible to host the global business in Cape Town, the cost of international bandwidth is prohibitive. "We are paying through our necks for bandwidth," he says. "If it were cheap enough, we would consider hosting all our infrastructure here. The fact that telecoms in SA is so expensive is dragging this country down. Telecoms is a catalyst for economic growth but in SA it's way, way too expensive."

As a result, MXit will be setting up infrastructure in other countries. Heunis won't say which, only that nine appropriate "zones" have been identified. The right conditions exist in Europe (chiefly the UK), the US, India, Pakistan and parts of the Middle East. Those markets have high cellphone penetration in the youth segment and widespread cellular data services. MXit won't enter countries that have cheap or even free SMS services.

While some telecom analysts suggest MXit will kill SMS, Heunis disagrees. "It's not an SMS replacement. When I send you an SMS you will be notified immediately. With MXit, and other instant messenger platforms, you have to sign in to get your message."

He adds that MXit has a good relationship with MTN, Vodacom and Cell C. MXit generates more GPRS traffic for the three operators than any other third-party service provider, he says. Because MXit has become popular, it's unlikely one of the mobile operators would dare block its subscribers from accessing it. If one did, it would risk losing customers to its rivals. The alternative strategy would be to slash the price of SMS, but the revenue forgone would still be significant.

For now, MXit maintains an awkward equilibrium with the cellphone providers, much like voice over Internet Protocol providers have with telephone companies. Competitors are also scarce in SA - the cost of development and technical knowledge required will scare many away. It's a good time to thrive.

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