The chronicle of Telcos vs. OTT

OTTThe battle lines were drawn long back between the Over-The-Top Content (“OTT”) services and the Telcos, since the launch of early Voice-over-Internet Protocol (“VOIP”) and messaging applications. The Telcos were already involved in the battle over shrinking voice revenues, and on the top of that OTT services started making a dent on their messaging revenues. In today’s era of smartphones, many believe YouTube, Skype, Facebook, Whatsapp etc., would lead to impending demise of Telcos and not without good reason.

What is happening?

According to Cisco’s latest report on Mobile data traffic, YouTube accounts for a quarter of mobile internet traffic and Whatsapp is leading in worldwide messaging traffic. In respect to importance of voice and messaging revenues for Telcos, they must prioritize strategies to protect future cash flow from these sources.

OTT will, undoubtedly, create disruption within traditional value ecosystem of Telcos, and threaten their voice and messaging revenues. Voice calls/messages and text messages still represent a crucial portion of Telcos earnings – according to recent Forrester report, on an average about three quarters of the revenues comes from both these sources. And EBITDA margins on voice and message are still higher than other services. This translates to higher impact of voice and message on Telcos valuations. The penetration of broadband has been a double edged sword for the Telcos. On one hand, higher number of connections translates to greater revenues, but on the other hand it has provided a platform for OTT services to effectively compete with Teclos. Moreover, most of OTT services are not integrated or bound within any particular network infrastructure and hence this hampers Telcos plans for capital intensive investment on infrastructure.

How have Telcos responded?

Telcos have already started to respond to this usurpation of the telecom segments by OTT services in multiple ways. Some of these ways include blocking OTT services, implementing surcharges etc., and could possibly lead to higher churn and users moving to alternative Telcos. Some of the different options that Telcos are using or likely to adopt to respond to OTT factor:

  • Blocking OTT: According to Reuters reports1, regulators in Vietnam are moving closer towards banning OTT services. In 2012, according to a media report2, Korean’s regulators allowed data throttling by Telcos to control proliferation of OTT services. This appears to be a short-term strategy and will most likely directly impact on revenue-generation for the Teclos both due to higher churning and lower data usage. Also, according to critics, such controls over OTT services are an attempt by Teclos to stall the inevitable revolutionary effects of the Internet.
  • Data Charges:  A majority of the Teclos are currently monetizing the access to OTT services via data charges in monthly packages. Such tactic of retaining billing relationship has not so far been highly effective according to most experts.
  • Telco app: Orange’s “Libon”, T-Mobile’s “Bobsled”, China Telecom’s “YiChat”, Swisscom’s “iO” etc., are some of the new voice/messaging app services launched by Telcos to counter the competition from OTT services. Most of these services offer free voice and text with a strategy to limit users to use rival OTT. However, the jury is still out if this strategy has presented a better off-net based revenue generating model.
  • Partnerships with OTT services: More and more Telcos are also exploring partnership opportunity with OTT players such as 3, Verizion with Skype, Reliance with Whatsapp, Airtel with Facebook etc. and benefit from their traffic. Such partnership gave illustrated that OTT also represents an opportunity for Telcos to monetize popular apps by providing them to customers as an incremental value-added service. However, I think such a strategy might not benefit the mid-small Telcos.
  • GSMA’s Joyn initiative – Teclos such as Telenor, Orange, Telefonica, T-Mobile, Vodafone etc. are attempting to create a new OTT standard by enabling Rich Communication Services3. While this GSMA-led initiative is very long term and has the potential to be the solution, but many Telcos feel, according to a recent survey4, it has taken too long to launch and probably not sure if Joyn can beat OTTs.

How would it look in future?

Even though the above mentioned strategies might just work, however, I think that the voice and messaging revenues will continue to slide for Telcos.

However, the change in customer behavior also provides an opportunity for the traditional Telcos to alter their business model. Though it’s easier said than done, Telcos have to re-model their business to be more flexible to enable the customers to receive services on-demand on any devices at any time. According to Forrester and other reports, the key basis of the evolving business model for Telco would have key distinct characteristics:

  • Adapt to OTT Model: As discussed earlier in this article, Teclos could launch their own OTT application. Although these services by themselves may not be very successful but it will be a beginning of changing the business model towards network independent strategy regarding service delivery and thereby reaching to customers outside the Telco’s footprint. 
  • Dynamic payment for OTTs: Another opportunity would be related to dynamic and customized pricing for the end-customers for OTT services. With Transaction management solutions like merchant discovery and the evaluation of sales leads, support for loyalty schemes, prevention of bill shock, and post-transaction support, Telcos can provide additional support to OTTs and viable revenue stream. Connectivity with devices and apps: Devices are the point of interaction between OTT players and customers. This gives Telcos an opportunity to create a distribution model for distributing contents on behalf of OTTs and have a revenue-sharing agreement. For instance the relationship between Amazon and Verizon for services on Kindle is a prime example.

As discussed earlier, Telcos will increasingly seek partnership with OTT services on many different levels as they see a huge surge in demand for smartphones and hence, data packages. For the bigger Telcos, it makes more sense to seek meaningful partnership with OTT services to make themselves more attractive to customers as well as partners. Apart from traditional alliances between OTT services and Telcos (Verizion ~ Skype; Reliance ~ Whatsapp), there are some other opportunities that needs to be explored as well.

Firstly, Telcos could re-position themselves as wholesale operations providers (such as network management and connectivity) for OTT services. Secondly, Telcos could gain by providing Enterprise OTT players QoS delivery for high end offerings like HD video, mobile cloud-based solutions etc. Finally Telcos can leverage their “closeness” to customers by providing services that could include Customer Service, Customer Relationship Management, Customer Segmentation, Proximity Marketing etc.

Is it that bad?

The impact of OTTs on Telcos have been exaggerated by many critics and in reality, the situation may not be as panicking as it seems for the Telcos. The loss of Telco’s revenues does not always translate to equal gain by OTT services. This is because a major part of the revenues that moves from voice and messaging revenues of Telcos to OTT services actually goes out of the market altogether. Firstly because most OTT services are free or are very cheap, and do not have interconnect revenues, nor other fees. Further, the revenue loss from voice and message has also resulted in increase of mobile broadband tariffs.

Where do we go from here?

It is unlikely that messaging and voice revenues will die out anytime soon. Informa forecasts that global messaging and voice revenues and traffic will continue to increase through 2016, for three main reasons: The adoption and use of OTT service is far from universal; although there are multiple OTT service “communities” where consumers can interact each other for free, OTT users would typically use SMS or Voice calls when communicating with non-OTT users and messaging revenues is starting to hit its stride in the enterprise mobile messaging market.

ENDNOTES

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Disclaimer: The views expressed in this article are my personal views and do not reflect the views of my employer.

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