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Summary:

Consumers are gravitating to an ever expanding array of OTT services – much to the chagrin of telecom operators. Andreas Bernström, CEO of Rebtel, argues that not partnering up means missing out on big revenues and the control of their market.

Telecom operators are standing at a critical crossroad. With a continuous decline in profit from voice and messaging services – thanks in no small part to the adoption of Over-The-Top (OTT) services such as Google Voice, Skype, Whatsapp (and my company Rebtel), among many others – operators must explore  their options and seek out new revenue streams. As the industry gets increasingly complex and crowded, operators simply must have a firm grip on what their future business model is: Will they be demoted to mere bill carriers or will they embrace the potential for new revenues by partnering with OTT services?

The four waves of revenue

Telecom analyst Chetan Sharma says that the telecom industry has been through three distinct revenue waves in its history. First there was the voice wave, then messaging and finally data.

Both the first and second of these waves produced phenomenal profits for decades but now are in serious decline due to market saturation and the rise of consumer-friendly OTT alternatives. While many in the industry see the third wave as being a replacement cash cow, others believe operators must look beyond data revenue to the fourth wave: OTT and Value Added Services (VAS).

Having become accustomed to diets of “all you can eat” data bundles, consumers naturally expect the price of data to drop over time, not rise. If operators bump up data costs, we can assume consumers will respond by flocking to services like Freedom Pop, which relies on Wi-Fi as the main source of data, switching only to cellular data when Wi-Fi is unavailable.  So while data will undoubtedly continue to be a major part of operators’ revenue, there is only so much cash they can directly extract from it. And more importantly it’s highly unlikely that that revenue will ever compensate for those lost from the decline in voice and text use.

The fourth wave is already building rapidly, as people are now using their mobiles to do everything from paying their grocery bills and online shopping to downloading digital media or even checking their medical records. Virtually all of these services are provided not by operators but by third parties. This has understandably rattled most operators’ cages. Many have panicked and gone so far as to throttle their users’ service in response – or even completely blocked them from using services such as Skype (and later defending their moves citing policies hidden deep in the terms and conditions of consumers’ contracts).

Industry discovers benefit of OTTs

In January 2012, the Internet Telephony Services Providers’ Association in the UK condemned mobile operators Vodafone, T-Mobile and Orange for their use of such anti-consumer practices, leading European Commissioner, Neelie Kroes, to call for greater transparency. And since then tide in Europe slowly seems to be changing.

In September Swedish operator Telia not only backed down on plans to charge customers extra for using VoIP services, but even introduced special VoIP packages themselves. Such a move is an implicit acknowledgment of how operators must embrace progressive technological change and the desires of their customers, instead of trying to thwart them.

Indeed, more operators are continuing to accept this view and have begun the process of working with OTT services. Weeks ago Deutsche Telecom teamed up with online music provider Spotify to give users the option to choose a payment bundle with unlimited music streaming– even going so far as to not deduct usage from the user’s data allowance. Crucially, such deals not only enhance an operator’s offering to customers, but instantly transform the OTT service from being a competitive threat or parasite to a valued business partner.

These types of partnerships are not unheard of, of course. Examples include, with varying degrees of success, Vodafone and Three working with Skype in the UK; or AT&T combining with Twilio; and Sprint working with Google Voice. The problem has been that many such OTT acquisitions or partnerships from previous years have often felt reactive rather than a proactive from operators. A high failure rate in such partnerships often confirmed this suspicion. When such partnerships are run effectively however everyone benefits: Consumers get more choice, operators have more to offer and OTT services get to monetize their software.

Recent months have also seen a surge in news relating to operators partnering with established companies from other industries. AT&T recently teamed up with computer giant IBM to offer cloud-computing resources to Fortune 1000 companies. A potentially hugely profitable venture.

Elsewhere, Telefonica set up a new division within its company to analyse and then resell user tracking location data, mining and monetising the huge amounts of real-time consumer data already available to them.

It’s do or die time

OTT services are not a passing fad – to the contrary they have become so significant as to be a legitimate fourth wave of revenue for the telecom industry. Operators then must seek to partner with (or compete with) OTT services, and monetize those efforts. Failure to do so will inevitably lead to ceding their turf, consigning them to be nothing more than data carriers.

To preserve their market position, operators need to be among the vanguard setting new industry trends, to be more flexible so they may respond quicker to market demands. And they must look for opportunities to form intelligent partnerships with relevant technology companies.

Operators are standing at a critical crossroad.  They need to not only choose their path, but whom to walk it with.

Andreas Bernström is CEO of Stockholm-based Rebtel.

Photo courtesy of Shutterstock.

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  1. Thanks for the good overview Andreas. I certainly believe that operators need to choose a strategy, and that some will benefit from following the OTT way of producing services. But I do not think it alone will solve their revenue challenges, as today’s OTT competition is more about free than better value propositions. The fundamental challenge for operators in the messaging and voice area is that barriers to entry or almost none, and until operators finds ways to increase the barriers, or operators invent lasting competitive advantages, or business environment / business models change in operators favors, the outlook for service dominance looks grim.

    I believe the answer is a mixed approach, first and foremost to protect the control over their customer relationship so that operators are in control of customer pricing. A wholesale situation where for instance apple, controls the customer (like the iPad4 example from US) is to be avoided.

    There after operators need to work out an API strategy to take a larger value creation role towards partners. The spotify example you mention, as we saw from bredbandsbolaget first, then teliasonera is a partnership only about money, and is as sustainable as a marketing campaign. It was the bucks on the table that transferred spotify from bredbandsbolaget to teliasonera some years ago in Sweden. APIs to assets within operators control will enable operators to form better partnerships, the only problem is that those assets still are unproven as value to OTT services.

    Lastly, as long as the operator has the necessary scale, it might endeavor into OTT services in its own brand. The challenge I have seen from attempts made is that they tend to be unfocused and with no other vision and motivation beyond protecting the operator. That will not win them customers, and more segmented and targeted approaches are certainly needed, but it will require scale of an OTT provider to remain competitive.

    The future revenue of an operator can be optimized by exploiting the fact that barriers to entry on data products are low, and by inventing new and better pricing and product models. Opera webpass can be a start. Thereafter by building APIs and get in as part of the value creation of its partner to increase their switching costs and take part in the value directly or/and as part of data pricing. Successful OTT initiatives will work the same way, but new business models like adds etc might be needed to get back their investment.

    All in all a good outlook if operators opens eier eyes and start evolving instead of remaining focusing on protecting past positions. Best of luck to you all, and try to do it in a most customer friendly way. Anyway this will change the operating model of operators, and their cost transformation is a prerequisite as it is to the old network airlines that has tried the last five years transforming themselves to a new world, most without much luck….

    1. Only by setting some of their pride aside and exposing assets through API exposure can operators be part of future innovation. Sharing is more than caring, it is about evolving through the creative minds of others… But telco assets are only worth anything to developers when aggregated. At least in the beginning when speed and scale are of most importance. Zong, Boku and Bango, alternatively the big eco system owners are the current winners of the telco billing game…

      1. Hi Dante. I agree about the scale, but at the same time I register that Google, Microsoft and Facebook now are cutting direct deals with the operators. At the same time Operators start to work together on de facto implementations. I believe that Billing needs to evolve so that customer service cn answer and help customers that got to many “berries”, as well as introduce caps on spending for certain subscriptions. That will require assets not available to the billings aggregators.

  2. Typo in the the paragraph that starts with the future… I meant high barriers of course.

  3. A smart operator keeps to access. There is nothing in the operator DNA or the assets they posess which indicate a role to be played in the OTT layer. An operator exposing their APIs doesn’t scale! It only enables devs to develop something for that specific operator’s customers. In that sense operators need to start cooperating or someone stepping up taking an (unpopular among peers) aggregator role…

    Cheap, sustainable access is what operators should deliver. Increased value in the Service layer will also increase the value of accessing those services via the access layer. Operators should embrace Google, Apple & Co…

    1. Hi Ove. I agree partly to what you say, and as you see from my post there is no other way than achieving scale to enter the OTT / API space (ex Telefonica and Telenor cooperating on BlueVia). Just to give you some examples of assets I believe might be relevant for OTTs I would mention cash collection, quality, subscriber info, and to some extent differentiated business models for instance utilizing off peak for non time critical content transfers. When it comes to DNA, I fully agree. That is why a role must be performed differently from their existing business. The older telcos has already disrupted themselves ones in the transition from fixed to mobile telephony. I choose to be optimistic on their behalf and believe they can do it again. What is needed is visionary leadership and to transfer their focus from protecting to creating.

      Lastly I would argue that there are no either or. I see a prospherous future for the googles and apples, but I also believe that the world will not stop here. Especially Googles business model is very interesting and could deserve an own blogpost. The fact that more people pays tax in many emerging markets through their consumptions of local telco services than through government, and that google drives access prices down towards zero while taking the value out in information transferred to an international advertising market, out of reach of local government that actually owns (on behalf of the people) the core assets for any mobile business model namely frequencies, should get some thoughts about longer term sustainability.

      Anyway, lets hope that the development from dominant telcos to dominant Internet companies, do not only mean monopolies in new clothes. There are important things at stake and the closing of eco-systems, banning of compeeting services (browsers and app stores), is not a good sign for the future!

      1. First I agree that an operator can deliver components to the OTT players rather than aspire to be one themselves. Like off peak content transfers. This fits with today’s access business.. Bluevia is still far from interesting for devs, but might be a start if tons of more operators decide to join in. Quality subscriber info is a wet dream that requires operators to be much stricter when signing up subscribers. Especially pre-paid, and starting to wash the data… I think we agree on this I just see this as being an intelligent bitpipe up-selling components to the Service layer where scale is the biggest challenge. Nearly nothing of what you mention scales and therefore other players will seek out and deliver more scalable solutions. It might be a smart operator, but most likely not. Remember that it is the standards and protocols that give operators interoperability today, not their own means of “production” as a single operator…

        The bottom line and what’s hard to swallow for operators is that Service players don’t really need anything from the operators other than the prerequisite of providing access to end users…

        Telcos have disrupted themselves before going from fixed to mobile -but this is still within the realm of access.

  4. Sudski tumac i prevodilac za engleski jezik Sunday, November 11, 2012

    I completely agree with tomchr on this one!

  5. Andreas Bernstrom Monday, November 12, 2012

    Thanks for all the comments, great to be able to start some debate. Agree with many of your comments tomchr, and believe that operators can leverage their API’s in smart ways to benefit both themselves and their subscriber. We at Rebtel are certainly looking at how our technology thru simple SDK’s can create new ecosystems and ideas that everyone can benefit from, and Im sure operators could do this extremely well if they have the inclination.
    Another area where I think operators have a lot of opportunity is in understanding the benefits that digitalizing their business can have, both on their cost base but also on keeping their customers up to date and happy. The question is whether they have the DNA internally to execute.

  6. Great food for thought and your article does bring out one key factor, telecoms have to think out of the box and be aware of OTT and NOT dismiss as a passing fad. The biggest problem in the US and possibly elsewhere is people want free quality entertainment more than they want to watch dancing cats on You Tube. This is the real rub as content providers want far more per sub than is reasonably profitable for the Telecoms. Just follow the shrinking Netflix library stories. The greed of content providers will stall any efforts by Telcos to embrace OTT and a linear subscription video service such as IPTV or Cable will continue to rule in the near and quite likely the long term future.

  7. Comment to tomchr:
    Seen from a content owner or developer we want scale of distribution and ROI. That’s why we would go to an aggregator for APIs before a single operator. In the long term it would perhaps be beneficial to make deals with single operators to cut out the middle-man. It is all about the resources you have available to do technical integration and/or to do tax, legal and contractual work. Facebook is the eco system I have seen making the best approach. Using aggregators for technical integration but handling agreements regarding rev share themselves. For smaller players, we simply don’t have the resources to run around and that’s why the app stores revolutionized mobile content distribution. They provided greater scale than that of operators…together with visibility, distribution, payment and mechanisms for updating SW.

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