The Threat of OTT – What are operators doing about it; what can they do about it?

by Terry Norman

Let’s begin this blog by making the comment that OTT players are a new breed of service provider and they are threatening operator revenues.  Many leading commentators are talking about OTT revenue of about one third of current mobile operator revenues in a few years. Now whether that is revenue taken from the mobile operator or revenue created by the OTT provider is not important (probably it’s a mix of the two). What is important is that this is a substantial sum of money which makes the OTT phenomena and the threat to mobile operators worthy of investigation.

OTT services use an application on the customer device, or app, to provide services via the Internet. Voice and messaging are the ones offered by OTT players which are the most popular with mobile customers. These services compete directly with traditional mobile operator services and attack the mobile operator business both from the top and bottom line – revenues and infrastructure spend. By accessing voice and SMS services through their data plan, customers spend less on voice minutes and SMS. Additionally, OTT services consume network capacity, which undermines the quality of service that operators can offer to their customers. (The impact upon potential churn here is obvious.) And by consuming network resources OTT services force the operator to invest in infrastructure to maintain its current capacity. Even when customers access OTT services via their own Wi-Fi networks the effect is still felt by the mobile operator. When an operator subsidises a smart phone on contract it is with the understanding (at least in the operator’s mind) that the subsidy will be paid back in time in voice and SMS, but particularly voice, revenues.

How are operators dealing with the OTT threat?

Operators have tried a number of approaches to deal with the perceived threat of OTT services. In the past operators have tried blocking OTT services, in particular OTT voice. The technology exists for operators to in effect ban these services from their networks, but barring OTT services is not straightforward.

  • It is only worthwhile if all operators adopt the same strategy. Breaking ranks offers at least one operator the advantage afforded by offering free voice and SMS services to attract large numbers of new customers.
  • In markets where there is a new entrant, the strategy is similarly worthless. The new entrant has few customers and spare capacity, so little to lose and much to gain. Often the new entrant will adopt disruptive strategies competing on price and unlimited data bundles. Again the overall effect of the new entrant’s strategy would be the same as if an operator broke ranks in our first scenario.
  • Finally, there are legal issues and some would argue moral concerns which relate to net neutrality. The European parliament for example is generally critical of telecom companies' attempts to block customers from using OTT services – especially VoIP – on their mobile phones. According to the European Commission, maintaining "net neutrality" – whereby all internet traffic is treated equally – is important and companies shouldn't be able to control how customers use the network.

The lack of success of ‘blocking’ has forced operators to seek other ways to compete with OTT providers. Some have deployed their own OTT services. One of the latest and most comprehensive of these has been Tu Me from Telefonica. Tu Me offers OTT voice and messaging and image sharing. To give credit where it is due, the Tu Me service offering is more comprehensive than OTT voice and messaging, but still this has not prevented Telefonica from closing the service down due to poor uptake. In contrast to developing their own services, other operators believe the best strategy is to throw their support into initiatives, like Rich Communications Suite.

Developed by the GSMA (the trade association of GSM mobile operators) RCS offers the potential to combine voice and SMS with instant messaging or chat, live video sharing and file transfer across all devices and networks. RCS, marketed under the name Joyn, relies upon offering the customer similar services to OTT but with the added advantage of a carrier class of service. But it’s tough to compete with a multitude of app developers free to invent, innovate and implement within a development cycle of a few months. The success of WhatsApp is testimony to this. Some statistics at this point would be appropriate. WhatsApp was first introduced in 2010. By Q42012 the active, monthly subscriber base had grown to over 400 million (WhatsApp source). In one quarter alone, Q412, Whats app achieved 75% growth in terms of usage by carrying 7 billion messages per day compared with 4 billion per day in the previous quarter. The app marketplace allows only the fittest to survive. The most popular apps go on to gain ever greater market share. (Eventually of course they themselves become the dinosaurs to be replaced by the next generation of apps.)

Selling quality rather than quantity is another approach being advocated by some. This is the argument underpinning RCS and initiatives like HD Voice. Supporters of HD voice strategy argue that offering a better quality of voice service will attract customers who are prepared to pay for better quality. The argument is that the quality of OTT voice services cannot be guaranteed and therefore quality is a differentiator. We remain to be convinced on this one. Better bandwidth compression and improvements in bandwidth aided by the MNO introducing new, superfast technologies like LTE are eroding this differentiator. To underline the point, one of the best known OTT voice providers, Skype, is now offering HD voice.

What can operators do about it – partnering and app based pricing

It seems unlikely that operators will be able to block OTT services. So far all efforts to beat back OTT services has come to nothing and OTT is here to stay. However, operators still have a few tricks up their collective sleeves.

One obvious tactic is for operators to partner with OTT providers, and in effect sell their services to the OTT player. This is not a straightforward thing to do. Choosing the right partner and understanding the value proposition that they [the mobile operator] can offer requires a clear understanding of how consumers are using OTT applications, particularly voice and messaging. Operators need to know which apps are hot and which are not. They need to know how the app is consuming data. They need to know how long the customer retains the app before moving on to the next ‘hot’ thing.  However, given that most usage takes place over Wi-Fi networks, over which they have little or no visibility, gathering the data to identify the right partner(s) is a pretty tall order.

Another important development over the last twelve months is application based charging. Here the operator effectively replaces the unlimited data plans with custom plans tailored to the customer segment. For example subscribers who predominantly use their data allowance for social networking would sign up for a plan with allows them to access Facebook and other listed social network sites. A low-data package like this could be offered at a very low price, but a customer on this package would not be allowed to download heavy-data content, for example video. Any requests to download video would trigger an offer of a video bolt-on[2] for an additional fee. Whilst app based pricing is not yet fully developed, even rudimentary implementations are showing operators that they are at last able to monetise OTT services, disabuse the customer of the notion that data is free and move the customer away from the expectation that unlimited data is the norm.

The advantages of app based pricing not only favour the operator. If implemented well it offers a number of customer benefits too. In particular, they receive packages tailored to their needs and they can spend their money as they like. Additionally, customers learn the ‘value’ of data. Getting customers to understand what 1GB of data actually meant to them was a major obstacle to content based pricing in the past. App based charging overcomes this problem in an effective and seamless way.

However application based charging is a fairly recent innovation, and, notwithstanding the issue of net neutrality, there are a number of operational issues still to be overcome:

  • In order to bundle together appropriate collections of data services for specific customer segments,
  • The operator will need to know what type of traffic customers are consuming and which apps they are using,
  • In order to offer data supplements in real time, the MNO needs real time interaction with the customer, for example when requesting a video clip download a pop-up should appear offering the appropriate data supplement.

So whilst an operator can use partnering and app-based pricing to counter the threat from OTT services both require a degree of customer profiling which operators do not (yet) posses.

Accurate customer profiling – the first step towards countering the threat from OTT

Currently OTT services are growing at an astonishing rate. If the current situation continues unchecked by MNOs, and if the leading commentators in the field are proved correct, in as little as 3 to 4 years, the leading top ten operators could be losing as much as 35% of their revenues to OTT services. Operators don’t need convincing that they need to address this situation, but what to do and how to go about it are not easy problems to solve.

Partnering with the right OTT providers requires a clear understanding of the value position that the MNO brings, in turn the operator needs to know how its customers are using the various apps in order to understand the appropriate differentiators. Similarly, in order to embark upon app based charging, the MNO must understand the usage patterns and characteristics of its customers in order to segment its customer base and to develop the appropriate service bundles.Clearly planning strategies to deal with these problems requires access to accurate consumer data. Planning how to react to changing consumer behaviour without knowing how the consumer is behaving is self-evidently pointless. Ideally, the operator would be able to monitor in real time and at the point of use how customers use their mobile phone.

Research we have carried out indicates that mobile operators know little about the habits of their customers when using these OTT services. They do not know which ones their customers are using and to what extent and how long they continue to use the app before changing to a substitute application. Operators are no more enlightened when it comes to understanding how their customers are using their mobile devices to access services when they are using Wi-Fi networks.

Operators should analyse how mobile customers are using their apps. This includes their usage over other operator networks and Wi-Fi networks. They should analyse customer data and understand what’s hot and what’s not in terms of usage and services. They should understand app churn and important app service metrics for example latency and peak rates. Operators should then:

·        Segment their customer base and look to offer tailored contracts which suit the needs and usage requirements of their customers,

·       Investigate the potential and mechanisms required for real-time customer interaction to deliver app based charging,

·       Define their unique value proposition and approach prospective partners.

 

For more information please contact Dr Terry Norman, Director and Co-founder of Wireless Explorers – terry.norman@wirelessexplorers.com

 

[1] - Voice services between callers which uses the Internet Protocol to communicate over the Internet. Skye is probably the best known example of this service.

[2] A supplementary data allowance which is usually configured as fixed lump of data offered as a single sale. For example $10 for 5GB of video data.