Over-The-Top (OTT) Services:How Operators can overcome theFragmentation of CommunicationA report by    Sponsored byPAGE 1 ...
Table of contentsInformation										3Introduction									4Executive summary								6 - 8OTT evolution & fragmentation		...
The impact for operators: traffic & revenues				   21 - 25           The operator response								26 - 29           Can op...
InformationMethodology                                                  SourcesResearch was conducted by mobileSQUARED    ...
IntroductionThe inevitability of the mobile sector is that voicerevenues are declining, and messaging revenueswill tread a...
Executive summaryThe rapid adoption of smartphones has provided           Similarly, Skype is to voice what WhatsApp iscon...
Executive summary       73.7% of operators identified       messaging as the service most                                 ...
Executive summaryperiod through a combination of OTT and competitive            amount of users that would use a rival OTT...
OTT evolution & fragmentationOTT waves of activity                                     Interestingly, Skype claims that it...
OTT evolution & fragmentationon mobile was RIM’s BlackBerry Messenger. Until          – according to Google recently – can...
OTT evolution & fragmentation1.	 The lack of device/OS interoperability (BBM,         Though coming from a smaller footing...
OTT evolution & fragmentation  As OTT services proliferate further,  more companies and developers will                   ...
ForecastsSmartphone forecasts                                   with SMS across the US, where SMS is bundled with         ...
ForecastsOTT market forecasts                                     As of 2012, 20% of global smartphone                    ...
Forecasts        customer base will be using OTT services,        leaving 10.5% of operators anticipating more     While t...
Forecasts•	    Off-net-to-video users are expected to grow               139.5 million by 2016.      from 2.96 million in ...
Forecasts                                                                         Total number of OTT users               ...
ForecastsOTT penetration in the UK will almosttreble during the forecast period, from      13.2 million to 36.9 million.FI...
The operator viewThe mobile operators are right to be concerned about    to traditional SMS- and voice-based services, has...
The operator viewWith voice commoditisation now widely regarded as agiven across the telco industry – with or without OTTs...
The impact for operators:                                                       traffic & revenuesThe operator survey by m...
The impact for operators:traffic & revenues                                                                 In 2012, 31.6%...
The impact for operators:                                                     traffic & revenuesOver 45% of European opera...
The impact for operators:traffic & revenuesForecasts on the financial impactof OTT for operators                          ...
The impact for operators:                                                     traffic & revenuesFIG 15 – TRADITIONAL MOBIL...
The operator responseAt Mobile World Congress 2012, the chairman of the      long-since responded to the threat of OTT to ...
The operator responseOther operators are challenging the likes of               Clearly a number of operators are explorin...
The operator responseand could unquestionably result in churn as users          In fact, 25% of operators had a very simil...
The operator response    to around 18% of European operators. And the    same number of European operators is looking to  ...
Can operators make money from OTT?Almost 16% of operators believe they will generate       operators expecting revenues at...
Can operators make money from OTT?terminate the OTT off-net traffic, provided of course     provider to mediate next-gener...
Opportunities for operatorsOTT services can only thrive in the mobile ecosystem        that will partially substitute the ...
Opportunities for operatorsAs Skype and WhatsApp have highlighted, users are         operators must adopt a multiple OTT s...
Whitepaper: Over-The-Top (OTT) Services: How Operators can overcome the Fragmentation of Communication
Whitepaper: Over-The-Top (OTT) Services: How Operators can overcome the Fragmentation of Communication
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Whitepaper: Over-The-Top (OTT) Services: How Operators can overcome the Fragmentation of Communication

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The result of extensive interviews and research by analyst firm mobileSQUARED and sponsored by mobile interaction specialist tyntec, this whitepaper features new figures and forecasts drawing upon data from 68 countries. It forecasts that OTT communications will generate termination and interconnect fee-based revenues for mobile operators of US$ 3.7 billion in 2012 rising to US$ 8.4 billion in 2016. The implications of this figure are clear: there is a big opportunity for forward-thinking operators to generate revenue through OTT. This whitepaper outlines the variety of operator OTT strategies deployed so far and uses the data to illustrate what will work best in the future.

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Transcript of "Whitepaper: Over-The-Top (OTT) Services: How Operators can overcome the Fragmentation of Communication"

  1. 1. Over-The-Top (OTT) Services:How Operators can overcome theFragmentation of CommunicationA report by Sponsored byPAGE 1 │ August 2012
  2. 2. Table of contentsInformation 3Introduction 4Executive summary 6 - 8OTT evolution & fragmentation 9 - 12Forecasts 13 - 18The operator view 19 - 20 │ PAGE 2
  3. 3. The impact for operators: traffic & revenues 21 - 25 The operator response 26 - 29 Can operators make money from OTT? 30 - 31 Opportunities for operators 32 - 34PAGE 3 │
  4. 4. InformationMethodology SourcesResearch was conducted by mobileSQUARED Mobile operators included in the OTT research are:during May and June 2012. The first wave of operator AT&T, EverythingEverywhere, T-Mobile Czech Rep.,research was conducted in 3Q2011. Orange LA, Telefonica Spain, Telenor, TeliaSonea,mobileSQUARED forecasts are based on Sprint, T-Mobile International, 3UK, Tigo, T-Mobilesubscriptions, and not subscribers, and factors in UK, Bouygues Telecom, MTS, Vodafone Italy,consumers owning more than one smartphone Turkcell, H3G Italy, Orange France, Zain, O2 UK,device. Telekom, BanglalinkGSM, CYTA, Starhub, Maxis, Telecable, Vodafone UK, Orange UK, T-Mobile Ger-The forecasts are based on smartphone users many, Vodafone Germany, Orange Polandidentified in the leading 68 mobile markets globally(see above). Total mobile users and smartphone fore- Nb: Not all operators wanted to be listed.casts are from mobileSQUARED’s ongoing researchinto the leading 20 mobile markets. The remaining 48 The 68 countries researched are:markets were researched as part of process for this China, India, us, Brazil, Indonesia, Russia, Japan,project. Pakistan, Germany, Nigeria, Mexico, Italy, Bangla- desh, Philippines, UK, Vietnam, Egypt, Thailand, Iran,Total OTT subscribers and OTT subscriber growth Turkey, France, South Africa, Ukraine, South Korea,is based on the average subscriber penetration as Spain, Argentina, Poland, Colombia, Saudi Arabia,identified by mobile operators during the research Algeria, Taiwan, Romania, Malayia, Venezuela, Peru,process, and applied to the smartphone population in Morocco, Canada, Netherlands, Australia, Chile,each market. Both Skype and Whatsapp were Guatemala, Portugal, Sri Lanka, Ecuador, Greece,identified during the research process as the leading Czech Rep., Nepal, Sweden, Hong Kong, Austria,OTT voice and messaging service provider, and Belgium, Hungary, UAE, Bulgaria, Israel, Finland,therefore provided the most visible use cases for the Singapore, Denmark, Azerbaijan, Slovakia, Norway,forecasting. Jordan, Ireland, Lithuania, New Zealand, Lebanon, Estonia, Montenegro.Voice traffic (frequency) is based on Skype’s off-netusage (including Skype’s projected growth), and mes-saging traffic is based on Whatsapp (including growthduring the forecast period).Termination costs used in the forecast process arebased on a variable rate for off-net-to-fixed calls,ranging from $0.015, $0.025, $0.035, and a universalrate of $0.06 for off-net-to-mobile calls, and a flat-rateof $0.01 for SMS. INFORMATION │ PAGE 4
  5. 5. IntroductionThe inevitability of the mobile sector is that voicerevenues are declining, and messaging revenueswill tread a similar path in the next year or two. OverThe Top (OTT) services are already having a majorimpact on the mobile space, and this will only beexacerbated in the future. OTT service providers areshaking up the communications space and causingconsiderable consternation along the corridors ofmobile operators around the world.The debate of whether OTT services should beconsidered a threat or opportunity is old hat. Mobileoperators will view OTT as an opportunity to generateincremental revenues, the only question is when.Operators openly facilitating an OTT strategy will beable to explore the opportunities and enjoy the OTTrevenue pie considerably sooner than an operatorviewing OTT as an insurgent service.This White Paper explores the ‘Fragmentationof Communication’ and focuses on how mobileoperators can capitalise on the OTT opportunity. It isbased on research conducted by mobileSQUAREDbetween May and June 2012 and incorporatesmobileSQUARED’s original OTT research from Q22011.PAGE 5 │ INTRODUCTION
  6. 6. Executive summaryThe rapid adoption of smartphones has provided Similarly, Skype is to voice what WhatsApp isconsumers with access to a wide variety of becoming to messaging. Based on existing appcommunication services which go beyond the download data, mobileSQUARED estimates theretraditional services of voice and messaging provided are 75 million WhatsApp users globally, and thisby mobile operators. Yet the majority of these is projected to increase to 250 million by 2016.proprietary OTT (Over-The-Top) communication Presently, WhatsApp users are sending 2 billionservice providers do not permit cross-platform messages a day, which equates to 27 messages perfunctionality and therefore limit the capability of user per day. By 2016, mobileSQUARED forecaststheir services. Consequently, the rise of these the 250 million users to be sending 11 billionOTT services has created an era of fragmented messages per day (or 4 trillion per year), with ancommunications in which consumers cannot easily average user sending 44 messages per day.communicate outside the ‘walled gardens’ of theirrespective service/app. This weakness presents There are now multiple communication channelsmobile operators with an ideal opportunity to adopt open to users – in particular smartphone users. Bya key role in enabling OTT services and associated 2016, global smartphone penetration will stand atrevenues, as they seek new business models to 39%, meaning over one third of population of mobileoffset the decline in voice and messaging revenues. users will be able to access OTT services via their The rapid adoption of smartphones smartphone. An iPhone user, for instance, can send a has created an era of fragmented message via SMS, iMessage, Facebook, WhatsApp, Viber and Skype to name but a few. As OTT services communications whereby proliferate further, more companies and developers proprietary OTT service providers do will look to get in on the act, and flood the market with not permit cross-platform OTT services. This period can be described as the functionality and therefore limit the ‘Fragmentation of Communication’, and the mobile capability of the service. operators that best understand how to capitalise on this opportunity will be the ones that are best able to offset the inevitable voice and messaging decline with OTT.Skype is leading the OTT charge with over 900 Mobile operators are concerned. Research bymillion users spending over 1 billion minutes a day mobileSQUARED reveals that:making peer-to-peer Skype-to-Skype calls (free) and • 79% of operators believe that OTT clients onwith its number of daily off-Skype minutes (charged to smartphones are a threat to traditional SMS- andmobile or fixed-line) approaching 40 million minutes voice-based services.per day. Skype has now become to OTT whatFacebook is to social media. • 73.7% of operators identified messaging as the service most challenged by OTT. EXECUTIVE SUMMARY │ PAGE 6
  7. 7. Executive summary 73.7% of operators identified messaging as the service most From a total global mobile subscription base of over challenged by OTT. 7 billion, mobileSQUARED forecasts that the total number of OTT users on smartphones will rise from 276.8 million in 2012 to 1.32 billion in 2016. As of 2012, 20% of global smartphone users are actively using OTT services, and this will reach 45% by 2016.• 57% of operators expect 11-40% of their Perhaps most notably for mobile operators, is that customer base to be using OTT services by the OTT users in 2012 will only account for 2% of the end of 2012. total global mobile subscription base, and 18% in 2016. OTT users in 2012 will account• 42% of operators expect over 40% of their for only 2% of the global mobile customer base will be using OTT, while 50% expect 21-40% of their users on OTT services. subscription base, and 18% in 2016.• 100% of operators now believe voice and SMS traffic over the mobile network will decline over the next 5-10 years.• 37% of operators believe the decline in voice and Messaging represents the largest off-net operator messaging revenues will be 1-20%, and 53% revenue generating community, with 118.9 million expect 21% and over – almost double the number users already sending paid-for messages this year, of operators compared to the previous year. jumping to 534.9 million users in 2016, according to mobileSQUARED forecasts. This is followed byHowever, despite the various concerns, most of OTT-to-mobile voice users: 68.6 million users in 2012operators believe that it is possible to make money rising to 434.7 million in 2016. And then OTT-to-fixedout of OTT: voice users: 49.8 million rising 132 million in 2016. Off-net-to-video users are expected to grow from 2.96• 63% of operators believe they will make money million in 2012 to 215.7 million in 2016 as the video from OTT services, but only at the expense of communications bug sweeps the globe. voice and SMS revenues. 16% of operators believe they will generate incremental revenue mobileSQUARED forecasts the OTT market to be from OTT services. worth US$166.5 billion in 2016, but its impact is already being felt by mobile operators today. The• Only 21% of operators either believe operators forecasts include OTT messaging services costing cannot make money from OTT services or remain mobile operators US$4.2 billion in 2012, rising to undecided. US$12.5 billion by 2016. The impact of OTT on voice is even more transparent, with total mobile voice revenues forecast to fall from US$714 billion to US$573.51 billion over the 2012 to 2016 forecastPAGE 7 │ EXECUTIVE SUMMARY
  8. 8. Executive summaryperiod through a combination of OTT and competitive amount of users that would use a rival OTTprice erosion. service, it fails to present a compelling OTT off- net based revenue-generating model.Embracing OTT should not be viewed by the mobile • Partnering directly with OTT players: operatorsoperator community as a way of substituting the can partner directly with the likes of Skype,decline in voice and messaging revenues, but as Google, etc., and benefit from their traffic.a means of delivering a new incremental revenue However, this will probably benefit the largerstream that will experience exponential growth in the operators.long term. After all, consumers are embracing OTT • RCS-e/Joyn: the GSMA-led initiative is veryservices in their hundreds of millions – leaping to long term and whilst operators prepare to deploybillions within a few years. It is consumers opting for RCS-e, operators can adopt other initiatives inmultiple communication alternatives that have created parallel.this Fragmentation of Communication. It is this factorthat will ultimately open the door of opportunity for • Third party access to OTT via mobile phonemobile operators. numbers: mobile operators can position Embracing OTT should be viewed by themselves as the bridge between OTT off-net mobile operators as a way of traffic and the mobile customer and remove all delivering a new incremental walled gardens by using the mobile number. This revenue stream that will experience enables the operator to keep the traffic and gain exponential growth in the long term. a share of the revenues. mobileSQUARED forecasts that OTT commun- ications will generate termination and interconnectOperators should focus on a multiple OTT strategy fee-based revenues for mobile operators of US$3.7founded on developing a long-term relationship with billion in 2012 rising to US$8.4 billion in 2016.the customer. Operators have a wide range of options Messaging will dominate the revenue landscapeto tackle the OTT opportunity: over the forecast period, followed by off-net calls to• Blocking OTT: short-term strategy that mobile, while the contribution made to off-net fixed will ultimately limit the revenue-generation line calls is negligible. Therefore, the incremental possibilities for the operator. revenues generated from OTT interconnectivity will reduce the annualised decline in voice and• Retaining billing relationship/data charges: messaging revenues (US$30 billion) by over 25%. mobile operators can monetise the access to OTT services via data charges bundled within the monthly package.• Telco app: while this strategy might limit the EXECUTIVE SUMMARY │ PAGE 8
  9. 9. OTT evolution & fragmentationOTT waves of activity Interestingly, Skype claims that it has up to 65 million users logged on and using the service simultaneouslyThe OTT communications story has been well at any given time during the day – though onlinedocumented in recent years, but in order to grasp Skype aficionados Skype Numerology claims thishow it will continue to redefine the industry, it is number has only recently peaked at 42 million.necessary to understand its progress to date. Regardless, even with the latter figure it represents an active online community similar to the size ofOTT has developed in two waves: Firstly, it was fixed Spain, one that is large enough to have a significantvoice services, and especially international calling, impact on the communications industry.that provided the route to market for OTT serviceproviders like Skype and Vonage, using IP-based Skype has disclosed that its users spend over 1voice services to massively undercut the existing billion minutes a day making peer-to-peer Skype-to-operator rates. The second wave of OTT growth was Skype calls (free), and the number of daily off-Skypeborne out of the rise of smartphones and the ability to minutes (charged to mobile or fixed-line) is 30 millionpackage OTT services as apps that could be installed – as of September 2011, though mobileSQUAREDas a client on the device. This latest wave not only estimates this figure to now be 35-37 million minutessupplemented existing fixed-line activity, but has per day. While the latter is generating revenue fortargeted mobile voice, messaging, and most recently the telco industry by way of interconnection (orvideo. termination) fees, the former is clearly subvertingOTT has developed in two waves: fixed revenues from telcos.voice services, especially international On the back of Skype’s success, a number of rival calling, and OTT packaged in service providers have emerged, most notably a smartphone app targeting mobile Google Voice, though minimal information has voice, messaging and video. been released since 2009 about the service. mobileSQUARED conservatively estimates the service to have amassed around 9.5 million users globally, primarily because Skype has now become to OTT what Facebook is to social media, and hasLeading the OTT charge is Skype. MobileSQUARED become the dominant force in the OTT fixed-lineresearch reveals that the Microsoft-owned company space.now has over 900 million users – and towers overalternative telecoms service providers such as The perceived threat of OTT services by mobileVonage at around 3 million users. To put this into operators is undoubtedly real, and now beingperspective, Skype has a similar user base to confounded by this next wave of smartphone-Facebook. Skype then, is a behemoth in the OTT based OTT apps. One of the original OTT servicesspace.PAGE 9 │ OTT EVOLUTION & FRAGMENTATION
  10. 10. OTT evolution & fragmentationon mobile was RIM’s BlackBerry Messenger. Until – according to Google recently – can download anyrecently BlackBerry had 75 million users worldwide, of the OTT services available.but it is now haemorrhaging users at an alarmingrate as its users “hot leg it” over to Android or iOS. The lack of inter-device and platform interoperability The lack of cross-platformApple has recently was explicitly highlighted in 2011 connectivity between BBM and bothconfirmed that it is when RIM’s BBM network dropped iMessage and Facetime on iOS arenow approaching for a number of days, preventing synonymous with the fragmentation350 million iOS its users from connecting – though associated with the mobile industry,devices globally, with basic voice and SMS services and stifles the impact OTT could haveiPads accounting were unaffected. Intriguingly,for 60 million BBM originally set a messaging on mobile traffic and revenues.devices. That means OTT precedent for its alternativea potential (and proprietary SMS solution, butgrowing) user base because the service is inextricablyof 350 million for linked to the Blackberry devicesiMessage. – which are experiencing an alarming decline in sales and suffering from the greater appeal of AppleAmid growing speculation, RIM is believed to and Android devices – BBM looks to fall victim ofbe considering splitting off its messaging and its self-imposed walled garden. A similar outcomeemail platform from its hardware division. If that could one day befall Apple and iMessage. While thisdevelopment happens, it could stand to gain lots of appears unlikely right now, the same could be saidadopters in corporate circles to run its services as of RIM several years ago, and clearly demonstratesapps on other smartphone platforms. the compelling need to provide cross-platformThe OTT walled gardens interoperability. In fact, the same can be said of Skype, but to date its fixed-line dominance is yet to translate in the mobileThe lack of cross-platform connectivity between arena. All the while, new talent is emerging andBBM and both iMessage and Facetime on iOS, for developing incredibly strong and loyal followers, suchexample, are synonymous with the fragmentation as WhatsApp and Viber. And that’s before the likes ofassociated with the mobile industry, and stifles Facebook and its Messenger service gets a mention.the impact OTT could have on mobile traffic andrevenues. As yet, a proprietary messaging-based As is customary with proprietary OTT services,service has not been developed exclusively for interoperability can be considered their shortcoming.Android users, which means the 300 million Android Indeed, we have identified three main areas ofdevices globally (around 13 million Android tabletusers), and the 850,000 users being added every day interoperability: OTT EVOLUTION & FRAGMENTATION │ PAGE 10
  11. 11. OTT evolution & fragmentation1. The lack of device/OS interoperability (BBM, Though coming from a smaller footing, Viber too is iMessage) on the march. Between February and May 2012, the2. The lack of app interoperability (WhatsApp, Viber) company leapt from 50 million users to 70 million,3. The lack of interoperability with featurephones generating over 1 billion minutes and sending over 1 and non-IP-based devices. billion texts per month. A lack of interoperability is a key In South Korea, OTT messenger app KakaoTalkshortcoming in OTT services, creating has been downloaded by almost every smartphone self-imposed walled gardens, which user – there will be 42 million by the end of 2012, and limit their reach. already they are sending 1.3 billion messages daily. By the end of 2012, there will be a cumulative total of almost 190 million people using WhatsApp, Viber and KakaoTalk – though there will be user crossoverAnyone with a smartphone can download WhatsApp, between the services. And this does not evenand therefore overcome the cross-platform limitations account for Facebook, which has around 500 millionoffered by BBM and iOS. However, the vertical mobile users globally. However, while in all probabilitylimitations of one model are only rotated 90 degrees the majority of WhatsApp and Viber users are highlyto the horizontal model of WhatsApp, whose users likely to be on Facebook also, the penetration ofcan only connect and send free messages to fellow Facebook Messenger among its mobile users is The Fragmentation ofWhatsApp users. To date, there is no option to go believed to be low. Communicationoff-net, or in this case, “Off-What”. Whether lookingat OTT from a vertical or horizontal perspective, eachservice has constructed what is more commonlyreferred to as a walled garden. There are now multiple communication channelsBased on existing app download data, open to people – in particular smartphone users. AnmobileSQUARED estimates there are 75 million iPhone user, for instance, can send a message viaWhatsApp users globally, and this is projected to SMS, iMessage, Facebook, WhatsApp, Viber andincrease to 250 million by 2016. Presently, WhatsApp Skype to name but a few. As OTT services proliferateusers are sending 2 billion messages a day, which further, more companies and developers will lookequates to 27 messages per user per day. By 2016, to get in on the act, and flood the market with OTTmobileSQUARED forecasts the 250 million users services.to be sending 11 billion messages per day (or 4trillion per year), with an average user sending 44messages per day.PAGE 11 │ OTT EVOLUTION & FRAGMENTATION
  12. 12. OTT evolution & fragmentation As OTT services proliferate further, more companies and developers will The rise of Skype has confirmed the globalisation of flood the market with OTT services, communications: international calls are no longer the further fragmenting communications. communications playground of blue-chip companies. Services like Skype, and its subsequent impact on operator international call charges, has made the service affordable, if not free.If we regard the development of social networking as To meet the demands of global communications,an indication for the development of the OTT market, operators must also ensure their global footprint isit is worth remembering that there was a seemingly as far-reaching as possible. With over 850 mobileendless flow of sites emerging until Facebook shone operators globally, that represents a lot of roamingthrough and established itself as the principal social agreements: the average operator has between 150network. Presently, niche social networking sites are and 400 roaming agreements. If operators are to usecropping up and targeting smaller, less-catered for global reach to their strategic advantage to addressaudiences. A similar pattern is likely to happen in the the mounting threat from OTT services, then theyOTT space. Whether Skype and WhatsApp end up too must limit any walled gardens within their directas the eventual market leaders remains to be seen, community and ensure their international footprint forbut it seems likely at this point. the delivery of both voice and SMS is as extensive as possible.Nevertheless, this period can be described as the Operators must limit any walled‘Fragmentation of Communication’, and the mobile gardens within their direct communityoperators that best understand how to capitalise on and ensure their internationalthis opportunity will be the ones that are best able footprint for the delivery of both voiceto offset the inevitable voice and messaging decline and SMS is as extensive as possible.with OTT.For instance, the majority of these services donot provide cross-OTT platform functionality, andtherefore operate within the confines of a walledgarden. While operators can use the lack of The globalisation of affordable (and free)interoperability across disparate OTT services to communications by the OTT players provides thepotentially provide a strategic advantage, they too operators with a limited window of opportunity.have their limitations brought about by the need to And this is only going to be squeezed as the OTTinterconnect with other operators. This too could be threat is exacerbated with the continued adoption ofcostly to operators. smartphones. OTT EVOLUTION & FRAGMENTATION │ PAGE 12
  13. 13. ForecastsSmartphone forecasts with SMS across the US, where SMS is bundled with data packages.To consolidate this point, across the 68 smartphone OTT-based messaging servicesmarkets covered in this White Paper, there will be are being used in conjunction with1.12 billion smartphone users by the end of 2012, SMS across the US.rising to 2.9 billion in 2016, by which point globalsmartphone penetration will be at least 39% of totalmobile users. There is a strong correlation betweensmartphone users and OTT services, confirmingthat consumers are finding a free or cheapercommunication alternative very appealing. This essentially makes SMS a sunk cost to subscribers, so users do not need to stop using them There will be 1.12 billion for sending messages nationally.smartphone users by the end of 2012,rising to 2.9 billion in 2016, achieving A survey of UK smartphone users bya penetration of approximately 39% of MyVoucherCodes revealed that 81% have total mobile users globally. downloaded at least one OTT service app. Of those, 50% use iMessage, followed by BlackBerry Messenger (BBM) on 40%, WhatsApp on 37% and Skype on 33%. What’s more, the survey claims that 40% of smartphone-based OTT service users have shifted their messaging traffic partially or completely away from SMS. While on first inspection this figure should send shivers down every mobile operator’s spine, an overlooked eventuality is that consumers have already paid for messaging (and voice) services as part of their monthly bundled package – of whichSOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 the majority of smartphone users are on in most of the developed mobile markets. For example, inA survey exploring OTT adoption rates among US 2011 KPN revised its prepaid tariffs by reducing thesmartphone users by Acision reveals that Facebook number of included monthly minutes and increasingis used by 37% of users, followed by Skype (17%), the available data in order to meet the changingTwitter (17%), iMessage (11%), BBM (10%) demands of consumers.and WhatsApp (5%). Consequently, OTT-basedmessaging services are being used in conjunctionPAGE 13 │ FORECASTS
  14. 14. ForecastsOTT market forecasts As of 2012, 20% of global smartphone users are actively using OTT services, and this will reach 45% by 2016.From a total global mobile subscription base of over7 billion, mobileSQUARED forecasts that the totalnumber of OTT users on smartphones will rise from276.8 million in 2012 to 1.32 billion in 2016 (FIG 2). FIG 3 – PERCENTAGE OF OTT USERS IN 2012 The total number of OTT users on AND 2016 smartphones will rise from 276.8million in 2012 to 1.32 billion in 2016.FIG 2 – TOTAL MOBILE UNIVERSE SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 OTT users in 2012 will only account for 2% of the total global mobileSOURCE: MOBILESQUARED, 2012 subscription base, and 18% in 2016.As of 2012, 20% of global smartphone users are According to the mobileSQUARED research, inactively using OTT services, and this will reach general operators expect (FIG 3):45% by 2016, though this could be considered aconservative estimate, as the impact of the network In 2012:effect could likely accelerate this number. Perhapsmost notably for mobile operators, is that OTT users • Almost one-third of operators expect 1-10% ofin 2012 will only account for 2% of the total global their customer base to be using OTT servicesmobile subscription base, and 18% in 2016. by the end of 2012. • 57% of operators believe 11-40% of their FORECASTS │ PAGE 14
  15. 15. Forecasts customer base will be using OTT services, leaving 10.5% of operators anticipating more While the mobileSQUARED OTT research reveals than 40% of the user base on OTT services in that virtually every OTT smartphone user will 2012. use the available messaging and voice services, mobileSQUARED has broken down those forecasts to reveal the extent of those users that will send off-In 2016: net communications – and will ultimately generate • Every operator expects over 11% of their revenues for operators. customer base to be using OTT services. In fact, 42% of operators believe over 40% FIG 4 – OTT SMARTPHONE USERS of their customer base will be using OTT BREAKDOWN BY SERVICE services. • More than 47% of operators expect 21-40% of their users on OTT services, leaving 21% expecting 11-30% of users.In regards to regions, 95% of European operatorsexpect more than 20% of their subscriber base to beusing OTT services within three years. In fact, almost50% of European operators expect over 40% of theirsubscriber base to be using OTT by 2016. In NorthAmerica, the expectations are lower, with operators SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012split between 11-20% and 31-40%. In both Asia andLatin America, operators expect more than 40% ofusers on OTT services in 2016. This means (see FIG 4): 42% of operators believe over • Messaging represents the largest off-net 40% of their customer base will be operator revenue generating community, with 118.9 million users already sending paid-for using OTT services in 2016. messages in 2012, jumping to 534.9 million users in 2016. • This is followed by OTT-to-mobile voice users: 68.6 million users in 2012 rising to 434.7 millionThis data highlights the ease by which OTT players in 2016.will be able to access mobile operator customers, • OTT-to-fixed voice users will grow from 49.8and shows their concern around the perceived threat million to 132 million in 2016.of alternative services.PAGE 15 │ FORECASTS
  16. 16. Forecasts• Off-net-to-video users are expected to grow 139.5 million by 2016. from 2.96 million in 2012 to 215.7 million in 2016 • The number of OTT users sending off-net as the video communications bug sweeps the messages will increase from 26.1 million to 63 globe. million over the forecast period. While the number Messaging represents the largest of users making off-net mobile and fixed line off-net operator revenue generating calls will rise from 13.3 million and 8.5 million respectively, to 55.6 million and 14 million. community, with 118.9 million users already sending paid-for FIG 5 – OTT REVENUES IN THE UNITED STATES messages in 2012, jumping to 534.9 million users in 2016.Research for this White Paper has revealed that callsto mobile phones now dominate total voice trafficacross the developed world, and this has thereforebeen reflected in the larger number of OTT-to-mobileusers compared to OTT-to-fixed users. SOURCE: MOBILESQUARED , 2012 Total OTT users in the US areIt is also worth noting, that as more smartphone projected to total 47.5 million in 2012users download OTT service apps, the potential off- and grow to 139.5 million by 2016.net community diminishes, and explains why OTTuser growth is significantly higher than OTT to off-netOutlook for selected marketsactivity growth. In addition:United States • Off-net traffic will generate revenues in the US• The number of smartphones in the US will grow of US$795.9 million in 2012 rising to a fraction by 110 million over the 2012 to 2016 forecast over US$1 billion in 2016. period, with 155.6 million smartphones in 2012 • While OTT-to-fixed call revenues will be rising to 265.8 million in 2016. negligible over the forecast period, off-net• Total OTT users are projected by messaging will generate US$643.1 million and mobileSQUARED to total 47.5 million and grow to US$756 million in 2016. FORECASTS │ PAGE 16
  17. 17. Forecasts Total number of OTT users in Germany is expected to leap• Revenues generated from OTT off-net calls from 14.9 million in 2012 to to mobile will treble from US$71.1 million to 51.1 million in 2012. US$245.6 million.Germany• Despite a slow start in smartphone adoption, Germany is more than making up for it, with the In addition: number of smartphones almost doubling from 49 million in 2012 to 97.3 million in 2016. • The total OTT off-net opportunity in Germany will be worth US$250.5 million in 2012 and• The total number of OTT users is expected US$366.7 million in 2016. to leap from 14.9 million to 51.1 million over the forecast period. • Revenues from off-net messaging will dominate, generating US$202.4 million in 2012• OTT users sending revenue generating off-net rising to US$276.8 million in 2016. messages will grow from 8.2 million in 2012 to 20.4 million in 2016. • Combined fixed and mobile off-net calls will generate total revenues of US$48.1 million in• The number of OTT users making off-net fixed 2012 and US$89.9 million in 2016. calls will rise from 2.7 million in 2012 and 5.1 million in 2016, while those users making off-net UK mobile calls will leap from 4.2 million to 20.4 million. • The OTT projections are based on strong smartphone growth, with mobileSQUAREDFIG 6 – OTT REVENUES IN GERMANY projecting the number of users with smartphones from 43.1 million in 2012 and increasing to 70.3 million in 2016. • OTT penetration will almost treble during the forecast period, from 13.2 million to 36.9 million. • A breakdown of the total OTT users reveals that the number sending off-net messaging will be 7.2 million in 2012 and 16.6 million in 2016. • There will be significant growth of the number of OTT users making off-net calls, from 3.7 millionSOURCE: MOBILESQUARED , 2012 in 2012 and 14.8 million in 2016. • A number that is considerably higher than those users making off-net calls to fixed line: 2.4 million rising to 3.7 million in 2016.PAGE 17 │ FORECASTS
  18. 18. ForecastsOTT penetration in the UK will almosttreble during the forecast period, from 13.2 million to 36.9 million.FIG 6 – OTT REVENUES IN THE UKSOURCE: MOBILESQUARED , 2012In addition:• The UK’s OTT off-net market will be worth US$264.9 million in 2016, up from US$220.6 million in 2012.• Off-net traffic to fixed-lines will be non- existent, leaving off-net calls to mobile and off-net messages to attribute the bulk of revenues, with US$42.3 million and US$178.2 million, respectively, in 2012, increasing to US$64.9 million and US$200 million in 2016. FORECASTS │ PAGE 18
  19. 19. The operator viewThe mobile operators are right to be concerned about to traditional SMS- and voice-based services, hasOTT services. Research by mobileSQUARED in May increased from 16.2% in 2011 to 19.1% in 2012.and June 2012 reveals that 79% of operators believe This perhaps highlights that a small percentage ofthat OTT clients on smartphones are a threat to operators are now approaching OTT with a certaintraditional SMS- and voice-based services. level of pragmatism, and starting to understand the opportunities posed by OTT, rather than just79% of operators in 2012 believe that perceiving it as a threat. OTT clients on smartphones are a threat to traditional SMS- and FIG 9 – WHICH ELEMENTS OF OPERATOR voice-based services. SERVICE TRAFFIC WILL BE MOST THREATENED BY OTT CLIENTS?That is a lot of operators, but is actually down from83.8% compared to a similar study conducted bymobileSQUARED last year (see FIG 8).FIG 8 – ARE OTT CLIENTS A THREAT TOTRADITIONAL OPERATOR SERVICES? SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 However, within the 79% of operators that continue to identify the threat posed by OTT services, there is a growing number that is increasingly concerned with developments (see FIG 9). In 2011, 13.5% of operators strongly agreed with the statement that OTT clients on smartphones posed a significant threat to their voice and SMS traffic and revenues.SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 That figure has leapt to almost 32% in 2012, a year- on-year increase of 134%.In 2012, a regional breakdown highlights that 100%of mobile operators in North America, Latin America The research maintains that SMS continues toand Asia agree or strongly agree with the threat be the standout concern for operators. In 2011,posed by OTT. Similarly, the number of operators 67.6% of operators identified messaging as thethat are either unsure or disagree with the threat most challenged service by OTT, but that figure has increased to 73.7% in 2012.PAGE 19 │ THE OPERATOR VIEW
  20. 20. The operator viewWith voice commoditisation now widely regarded as agiven across the telco industry – with or without OTTservices – the challenge of OTT to voice servicesappears to be waning according to the operators,with 18.9% of operators believing voice was the mostthreatened in 2011 falling to 10.5% just 12 monthson. In 2011, 67.6% of operators identified messaging as the service most challenged by OTT, but that figure has increased to 73.7% in 2012.When it comes to video calling as a direct service,such as Tango, Skype and Facetime, operators donot expect OTT to have any impact, though “Other”as a service category representing all operatorservice traffic of voice, video and SMS, increasedbetween 2011 and 2012 from 5.4% to 15.8%. THE OPERATOR VIEW │ PAGE 20
  21. 21. The impact for operators: traffic & revenuesThe operator survey by mobileSQUARED collected means OTT is now affecting traffic for almostinformation on what the impact that operators have three-quarters of operators.already seen in traffic and revenues, as well as the • The research also shows that 42.1% of operatorsTrafficfuture impact (5-10 years). had an impact coming from OTT of 1-10% of traffic in 2012, up from 29.7% in 2011. Just over 10% of operators state that OTT has impacted onIt is inevitable, with so many OTT users, that this 11-20% of their traffic in 2012, compared to nowill impact on operators’ traffic, and subsequently, operators in 2011.revenues, but the extent of how much remains to be OTT is now affecting traffic forseen. Regardless of the bearer, which could be IP, almost three-quarters of operators:packet switched or circuit switched, the traffic will still 26.3% of operators have seen trafficrequire transporting, which means that it will actually declining in 2012.be the revenue associated with carrying the trafficthat will be impacted.FIG 10 – HAS TRAFFIC DECLINED IN THE LAST12 MONTHS AS A RESULT OF OTT? In 2011, 2.7% of operators said that OTT was affec- ting 21-30% of their traffic, yet in 2012 not one opera- tor said over 21% of their traffic was affected by OTT. Interestingly, 29.7% of operators were not aware of the impact OTT was having on their traffic in 2011, but 12 months on, that number had fallen to 21.1%. Clearly, the challenge posed by OTT to operators is a real one, and more operators are monitoring the situation more closely. When breaking down the operator research by regi-SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 on, the North American and Asian operators, as well as 15% of European operators, were yet to determi-The impact OTT services are having on operator ne whether OTT had had an impact on their traffic.traffic is clearly expanding (see FIG 10): Around 25% of European operators said OTT had not affected traffic, while 45% said between 1% and 10% of traffic had been lost. Just under 10% of European• In 2011, 37.8% of operators had not seen operators said between 11% and 20% of their traffic operator traffic declining, but that number has had been lost to OTT. since fallen to 26.3% of operators in 2012. ThatPAGE 21 │ THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES
  22. 22. The impact for operators:traffic & revenues In 2012, 31.6% of operators claim OTT is yet to impact onThe operator research reveals that 100% of opera- traditional revenues.tors now believe voice and SMS traffic will declineover the next 5-10 years, compared to 90% of ope-rators in 2011 (see FIG 11). Most intriguingly is thatmore operators now expect OTT to have a greaterimpact on traffic in the future, than they did in 2011: Taking operators out of their comfort zone and asking them to predict the impact of OTT over the next• Around 46% of operators in 2011 believed traffic 5-10 years provides a great variety of responses. levels would drop by 1-20% in 5-10 years‘ time, For instance in North America operators are bracing and 27% anticipated a traffic decline of 21% and themselves for a traffic loss of up to 30%, as are over. around 10% of operators in Europe. A little over 20%• But in 2012, 37% of operators believe the decline of European operators expect more than 41% of their will be 1-20%, and 53% expecting 21% and traffic to migrate on to OTT. Similarly, 20% of Euro- over – almost double the number of operators pean operators expect a traffic shift of up to 20% on Revenues compared to the previous year. to OTT, as do the majority of operators in Asia. 100% of operators now believevoice and SMS traffic will decline over In 2011 only one-third of operators had experiencedthe next 5-10 years, compared to 90% a decline in revenues as a direct result of OTT, but in of operators in 2011. 2012 that had doubled, leaving just 31.6% of ope- rators claiming OTT was yet to impact on traditional revenues (see FIG 12).FIG 11 – WILL TRAFFIC DECLINE IN THE NEXT FIG 12 - HAVE REVENUES DECLINED IN THE5-10 YEARS DUE TO OTT? LAST 12 MONTHS AS A RESULT OF OTT?SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES │ PAGE 22
  23. 23. The impact for operators: traffic & revenuesOver 45% of European operators are yet to see a FIG 13 - WILL REVENUES DECLINE IN THE NEXTdecline in revenues as a result of OTT, as are the 5-10 YEARS DUE TO OTT?majority of operators in North America and LatinAmerica. Around 25% of operators in Europe haveseen revenues decline by up to 5%. Just over 10% ofoperators claim more than 6% of their revenues havebeen lost to OTT. 43% of operators expect 11% and over of revenues to be hit due to OTT. SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012Given that operators believe the impact of OTT ontraffic has increased from 2011 to 2012, it is not About 18% of European operators are expectedsurprising that operators now believe OTT will have to put up a stoic fight against OTT services, bya greater impact on their traditional revenues (see claiming the next-generation services will not impactFIG 13): on current operator revenue levels. This is in stark• In 2011, 54% of operators believed OTT would contrast to almost 75% of European operators that impact 1-10% of operator revenues in the next do anticipate an impact revenues; 10% are bracing 5-10 years, with an additional 16% believing that themselves for more than 21% of revenues lost to the impact would be 11% and above. OTT, with the majority anticipating between 11-15% lost.• Jump forward 12 months, and the landscape has changed considerably. Almost 32% of operators North American operators are split between expect 1-10% of revenues to be impacted by OTT uncertainty and more than 21%, while Asian services, with 43% expecting 11% and over of operators are sitting in the middle expecting a revenues to be hit – up by a staggering 169%. revenue decline of 11-20%.PAGE 23 │ THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES
  24. 24. The impact for operators:traffic & revenuesForecasts on the financial impactof OTT for operators • In total, the mobile operators’ core services will generate revenues of US$1.114 trillion in 2012, and US$1.15 trillion in 2016.The ultimate question remains: what is the financialimpact of OTT on the communications industry? To FIG 14 – MOBILE MARKET FORECASTSanalyse this, we needed to look at the total mobilemarket:• In 2012, the mobile industry (made up of voice, messaging, VAS & access, devices, infrastructure and OTT) will be worth US$1.5 trillion, up from US$1.4 trillion in 2011, according to mobile analyst Chetan Sharma.• By using these market numbers as a platform to apply uniform total mobile market growth, mobileSQUARED projects the mobile market will SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 be worth US$1.97 trillion in 2016. In 2012, the mobile industry (made Over the 2012-2016 forecast period, data revenues will offset the decline in voice and messaging up of voice, messaging, VAS & access, revenues, which will be attributed to OTT directly and devices, infrastructure and OTT) will indirectly (see FIG 15). Chetan Sharma says the total be worth US$1.5 trillion. OTT market will be worth US$59.8 billion in 2012. Again, by using these numbers as a platform upon which to apply market growth, mobileSQUARED believes the OTT market will be worth US$166.5 billion in 2016. But how much of this growth canDuring this period (see FIG 14): account for the decline in mobile operator revenues?• Voice revenues will drop from US$714 billion to The total OTT market will be worth US$573 billion. US$59.8 billion in 2012.• Messaging revenues, which are expected to peak in 2012 at US$196.8 billion, will then fall to US$166.5 billion over the same period.• At the same time, data (and access) revenues are projected to almost double: US$222 billion to US$407 billion. THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES │ PAGE 24
  25. 25. The impact for operators: traffic & revenuesFIG 15 – TRADITIONAL MOBILE REVENUE economics and technological advancements, inGENERATION FORECASTS disintermediating some US$182 billion, equating to an annualized revenue hit of over US$30 billion over the same period. FIG 16 – IMPACT OF OTT ON MESSAGING REVENUESSOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012As already identified earlier in this White Paper,services such as Skype are shifting billions of dollarsof voice traffic away from the mobile operators eachyear. Can the same logic be applied to messaging?mobileSQUARED in fact believes that the impact of SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012OTT messaging services on messaging revenues issignificantly less than previously thought. For example, total global messaging ARPU will be worth $35.2 per annum in 2012 and $23.35 in Total global messaging ARPU will be 2016, based on Sharma and mobileSQUARED worth $35.2 per annum in 2012 and data (see FIG 16). If we then apply this figure to $23.35 in 2016. the number of OTT messaging users projected by mobileSQUARED, it shows that OTT messaging services will cost mobile operators US$4.2 billion in 2012, rising to US$12.5 billion by 2016. Cumulatively over this period, OTT messaging will potentiallyThe impact of OTT on voice is very transparent (see cost mobile operators US$41.9 billion in lost SMSFIG 15). Over the 2012 to 2016 forecast period, total revenues. OTT has been a driving force, alongmobile voice revenues will fall from US$714 billion with competition economics andto US$573.51 billion. The cumulative loss over that technological advancements, inperiod to the mobile industry is US$140.5 billion. disintermediating some US$182When combined with the loss of messaging over the billion in the operator market.aforementioned forecast period (see FIG 16), OTThas been a driving force, along with competitionPAGE 25 │ THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES
  26. 26. The operator responseAt Mobile World Congress 2012, the chairman of the long-since responded to the threat of OTT to theirGSMA and CEO of Telecom Italia, Franco Bernabe, voice traffic by introducing low-cost VoIP-basedtold delegates that OTT players “hinder competition national and international call services, requiringby relying on non-standardized technologies”, placing consumers to dial a prefix to activate the service ona “significant burden” on mobile operators. He also the operator’s network.claimed that the fall in ARPU across Europe from €26in 2006 to €20 in 2011 was increasing the pressure Yet it is the impact OTT is having on messagingon operators looking to invest sizeable sums in that is most alarming. Netherlands incumbent KPNnext-generation networks, to largely cater for OTT- announced earlier this year that it will lay-off 5,000generated traffic. US operator AT&T used the mobile employees as an austerity measure attributed toshowcase event to disclose that it is looking at ways the growth of OTT messaging apps which continueof ensuring app developers pay for the traffic their to reduce SMS traffic 15% year-on-year. Whileapps generate. OTT is extremely high on operators’ WhatsApp – which is particularly prevalent in theagendas. Netherlands – cannot be picked out as the sole contributory factor to this decline, it is undoubtedly The majority of operators have one of the key reasons. The strategy of thwarting long -since responded to the threat this impact on revenues is entirely understandable, of OTT to their voice traffic by prompting some operators, such as TeliaSonera in introducing low-cost VoIP-based Sweden, to block OTT services or to place a premium national and international call If you can’t beat ‘em, join ‘em on their customers using the service. services, requiring consumers to dial a prefix to activate the service on the operator’s network. But if you can’t beat them, join them. In some cases operators are directly partnering with OTT players: operators such as 3 UK and Verizon have partnered with OTT players, such as Skype. Operators are responding to OTT inBecause of the emergence of data heavy sites various ways, mostly by directsuch as Youtube, and video-on-demand catch-up partnerships with OTT players,services like the BBC iPlayer, these are generating creating their own telco app andmassive amounts of traffic, yet operators see none investing in Joyn/RCS-e.of the revenues but face the burden of buildinginfrastructure to support this.Yet responding to the challenge of OTT is not arecent phenomenon. The majority of operators have THE OPERATOR RESPONSE │ PAGE 26
  27. 27. The operator responseOther operators are challenging the likes of Clearly a number of operators are exploring OTTWhatsApp by launching their own take on the options, while others are moving in the oppositeservice: T-Mobile USA has launched Bobsled, and direction and confronting the issue. mobileSQUAREDTelefonica has introduced Tu Me, both of which offer believes hindering a consumer’s access to OTTfree voice and texts. Bobsled has attracted over 1 services, either through a paywall or blocking, willmillion users globally, with 95% of these users not ultimately prove deconstructive and drive churn.T-Mobile subscribers, whilst Telefonica is striving While there is no evidence to support thisfor a similar impact. Telefonica Digital’s Tu Me app assumption, experience from the mobile industryuses a customer’s data plan and allows not only O2 suggests that consumers will leave existing operatorscustomers, but any smartphone user, to make calls, for something they cannot have. And that is preciselysend voice messages, instant messages, photos and why AT&T and O2 paid a premium to securelocation from one control within one screen. What’s exclusive deals with Apple for the early days of themore, it lets users make free calls internationally if iPhone’s release in order to attract customers fromthey use wifi, and will automatically search existing rival mobile operators who had their eyes set oncontacts for other Tu Me users. Telefónica Digital owning an iPhone.claims “Tu Me puts all your communications needsinto one place, for free, and is a great way for people The iPhone had mass consumer appeal. And fromto stay in touch with those close to them.” a service standpoint, so does OTT. The problem between the two is that the benefit to the bottom lineTo counter the dominance of KakaoTalk in South is transparent with the iPhone, whereas this is not theKorea, mobile operators SK Telecom, KT Corp and case with OTT services. This is certainly reflected inLG Uplus have joined the GSMA’s Joyn initiative our operator research, which reflects their disparateand will deploy Rich Communication Services- response to OTT.enhanced (RCS-e) during the second half of 2012,joining the likes of Orange, Vodafone, Telefonica, In 2011, the traditional (or standard) operatorTelenor and T-Mobile. response to combat OTT clients was to say they were generating revenues from data. Last year,Hindering a consumer’s access to OTT almost 50% of operators believed this to be true, but services, either through a paywall or in 2012, that number had almost halved to 26.3%. blocking, will ultimately prove Operators, it appears, are starting to respond to OTT deconstructive and drive churn. service providers in a number of ways. The number of operators blocking OTT services has almost doubled from 5.4% in 2011 to 10.5% in 2012, and the number of operators imposing surcharges has trebled from 5% to 15.8%. These are certainly not customer-friendly reactions to OTT,PAGE 27 │ THE OPERATOR RESPONSE
  28. 28. The operator responseand could unquestionably result in churn as users In fact, 25% of operators had a very similar dual OTTseek alternative operators that are responding to OTT strategy: This was to roll out IMS/LTE to offer RCS/in a more constructive manner. RCS-e while also partnering with OTT providers. The number of operators blockingOTT services has almost doubled from While none of the operators divulged additional information during the research process, they clearly 5.4% in 2011 to 10.5% in 2012. see customer value in not delaying access to OTT services, and most likely, would pursue a strategy of migrating the customer onto their own RCS/ RCS-e service once IMS/LTE has been deployed.For example, the mobile operator research highlights This could, however, prove a risky strategy giventhat a little over 47% of operators are rolling out IMS/ that OTT service providers are developing a triedLTE and will be able to offer unified communications and trusted user community. An operator trying toby way of RCS and RCS-e. migrate established Skype users onto its in-house OTT service would be the equivalent of an operatorIn Europe, Telefonica, Vodafone and Orange have developing its own social network and targetingall made commitments to RCS-e. Over one third Facebook users, such as Tuenti in Spain or Vodafoneof operators have launched their own OTT-based 360. 47% of operators are rolling outclients, and almost one-third of operators have IMS/LTE and will be able to offerpartnered with OTT providers. unified communications by wayFIG 17 – WHAT ARE OPERATORS DOING TO of RCS and RCS-e.COMBAT OTT CLIENTS? While every European country will see LTE rollouts, with some smaller operators opting to not deploy the network, the vast majority are already trialing LTE (see FIG 17): • Our operator research reveals that presently almost 45% of European operators are rolling out IMS/LTE, compared to 100% in North America. • Similarly, 100% of North American operators are partnering with OTT service providers, comparedSOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 THE OPERATOR RESPONSE │ PAGE 28
  29. 29. The operator response to around 18% of European operators. And the same number of European operators is looking to block or impose charges to OTT services. 25% of operators had a very similardual OTT strategy: This was to rolloutIMS/LTE to offer RCS/RCSe while also partnering with OTT providers.This perhaps most saliently highlights the power-shift occurring in the operator space. Operators arein a Catch 22 scenario; they are not in a position toprevent customer usage of third-party services wherethey do not participate in the revenue flow, as thiswould leads to a mass exodus of customers, leavingthem with little option other than to provide access tothese services.PAGE 29 │ THE OPERATOR RESPONSE
  30. 30. Can operators make money from OTT?Almost 16% of operators believe they will generate operators expecting revenues at the expense of voiceincremental revenue from OTT services. However, and messaging.two-thirds of operators believe they will make moneyfrom OTT services, but only at the expense of voice mobileSQUARED forecasts that (see FIG 19):and SMS revenues. The remaining 21% of operators • Off-net OTT communications will generateeither believe operators cannot make money from mobile termination and interconnect fee-basedOTT services or remain undecided (see FIG 18). revenues for mobile operators of US$3.7 billion in 48% of operators believe it’s 2012 rising to US$8.4 billion in 2016 possible to generate revenue from • Messaging will dominate the revenue landscape OTT services. over the forecast period, followed by off-net calls to mobile, while the contribution made to off-net fixed line calls is negligible. • The cumulative total revenues from off-netFIG 18 – CAN OPERATORS MAKE MONEY OTT communications between 2012 and 2016FROM OTT? will be US$29.43 billion. Off-net OTT communications will generate mobile termination and interconnect fee-based revenues for mobile operators of US$3.7 billion in 2012 rising to US$8.4 billion in 2016.SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 With off-net messaging traffic forecast to be worth US$2.93 billion in 2012, and US$6.4 billion in 2016,Less than 12% of European operators believe OTT and OTT-offnet voice revenue worth US$805.5 millionservices will generate incremental revenues, with in 2012 and increasing to US$1.92 billion in 2016,almost 75% expecting revenues at the expense only the most dynamic and far-reaching operators willof voice and messaging. The remaining 13% of be best-placed to capitalise on this opportunity.European operators do not anticipate OTT willgenerate revenues. It was a similar split across Asia, Operators with the broadest reach in terms ofNorth America and Latin America, with the majority of roaming agreements will be well-placed to potentially CAN OPERATORS MAKE MONEY FROM OTT? │ PAGE 30
  31. 31. Can operators make money from OTT?terminate the OTT off-net traffic, provided of course provider to mediate next-generation OTT originatedthat they can accommodate the OTT-generated traffic (messaging, voice and video) with mobiletraffic. operators by converting it onto the SS7 network.FIG 19 – WHAT ARE THE OTT SERVICES THAT In this instance, OTT users are each issued with aWILL GENERATE REVENUES FOR OPERATORS? mobile number to ensure two-way communication between their OTT provider and mobile operators. Such a solution overcomes the walled gardens that have been erected by the OTT providers and can be applied to any operator anywhere in the world. One alternative option is to partner with a third-party provider to mediate next-generation OTT originated traffic (messaging, voice and video) with mobile operators by converting it onto the SS7 network.SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012 Operators with the broadest reach in terms of roaming agreements will be well-placed to potentially terminate the OTT off-net traffic, provided of Mobile numbers provide mobile operators with acourse that they can accommodate the compelling future-proof solution because they ensure interoperability with the inevitable emergence of new OTT-generated traffic. and even more innovative OTT service providers, therefore maximizing mobile operators’ revenue- generating potential from OTT off-net traffic.One solution to provide interoperability is to deployRCS/RCS-e, which the majority of operators in theresearch confirmed they were doing. But this is atimely and expensive exercise, and in part explainswhy a large percentage of operators are exploringmultiple OTT strategies.One alternative option is to partner with a third-partyPAGE 31 │ CAN OPERATORS MAKE MONEY FROM OTT?
  32. 32. Opportunities for operatorsOTT services can only thrive in the mobile ecosystem that will partially substitute the decline in voice andby way of mobile operators offering affordable data messaging revenues and will experience exponentialpackages to ensure an open internet experience for growth in the long term. After all, consumers aretheir customers. This threat is being compounded embracing OTT services in their hundreds ofby the fact that in smartphones, the mobile industry millions – leaping to billions within a few years. Ithas finally found a form factor and user interface is consumers opting for multiple communicationthat is not only compelling and intuitive, but has alternatives that have created this Fragmentationtransformed the relationship between the phone of Communication. This could open the door ofand user. Consequently, in this ‘Fragmentation of opportunity for mobile operators who have the abilityCommunication’ period, third-party providers are to bridge the OTT and mobile network divide throughdelivering services directly to consumers that are the provision of mobile numbers to each OTT user.challenging the mobile operator hegemony. Embracing OTT should be viewed by mobile operators as a wayOperators looking to rebuff this challenge by of delivering a new incrementalattempting to block OTT services to protect revenues, revenue stream that will experiencehas to be perceived as a short-term strategy that will exponential growth in the long term.ultimately limit the revenue-generation possibilities forthe operator.Voice revenues have peaked and are now on adownward spiral initiated by commoditisation andmore recently compounded by OTT services. Equally, TABLE 1 - OPPORTUNITIES FOR MOBILEmessaging revenues have long been projected OPERATORSto decline by the analyst community, and havefor the time being at least, resisted all downward Options Short Futureovertures to date. But mobileSQUARED expects OTT term proofmessaging apps to finally stifle messaging revenue’s Blocking OTT  xgrowth from 2013. Retaining billing   relationship/data chargesThat means operator cash cows of voice and Create an app  messaging are on the wane and every operator Partnering directly with  should be looking for new revenue generators. And OTT playersfalling within that category is OTT. RCS-e/Joyn x  3rd party access to OTTMobile operators should view embracing OTT as a via mobile phone  way of delivering a new incremental revenue stream numbers / share of revenues OPPORTUNITIES FOR OPERATORS │ PAGE 32
  33. 33. Opportunities for operatorsAs Skype and WhatsApp have highlighted, users are operators must adopt a multiple OTT strategy toattracted to free services. Skype’s business model cover all bases.has developed using the attraction of free on-netcalls to then upsell users of cheaper off-net national By retaining the billing relationship, mobile operatorsand international calls – at present the conversion will monetise the access to OTT services via datais around 10% of the total Skype user base. Most charges bundled within the monthly package.recently, the Microsoft-owned company has revealed By retaining the billingthat advertising will be introduced to on-net calls. relationship, mobile operators willHow its users react to the news remains to be seen. monetise the access to OTT servicesWhile it monetises its on-net traffic, it could also be via data charges bundled withinused as a tactic to drive on-net users into becoming the monthly package.premium paid-for customers. Clearly, a similaradvertising-based strategy might be deployed onWhatsApp at some juncture in the future.OTT services generally generate user traction bydelivering a free service. But these will eventually But this can be expanded by adopting a multiplerequire monetising, which means their model will OTT strategy founded on developing a long-termadapt, and potentially undermine the user’s original relationship with the customer.perception of the service. Mobile operators can usethis to their advantage. In the short- to medium-term mobile operators should be looking to provide customers with access to third- In the short- to medium-term mobile party OTT services. operators should be looking to provide customers with access to This can be achieved by launching their own version third-party OTT services. of an OTT service, such as Telefonica’s Tu Me app. While this strategy might limit the amount of users Telefonica could lose to a rival OTT service, it fails to present a compelling OTT off-net based revenue- generating model. Telefonica, as well as all operatorsAlthough mobile operators are in a reactionary mode interested in capitalising on OTT, should haveto the challenge posed by OTT providers, they are complete interoperability secured with OTT servicewell-placed to do so provided they are smart. For providers.instance, they must first ensure that they retainthe central billing relationship with the customer.Secondly, their global network must connect with asmany fellow operators as possible. And lastly, mobilePAGE 33 │ OPPORTUNITIES FOR OPERATORS

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