Can operators really succeed with Telco OTT
Times are tough for operators. Voice revenue is going down, SMS is being replaced by IP messaging and Facebook, and Data doesn’t seem well poised to replace lost revenue. Operators have no choice but to look to applications and content in hopes of generating new revenue streams, but this journey out of their comfort zone and into the larger web won’t be easy. Case in point is something called Telco OTT.
What is the definition of Over The Top?
The term OTT was originally coined to refer to the delivery of content and services over an infrastructure that is not under the same administrative control as the content or service provider. I’ve noticed several vendors have grabbed hold of this and changed its meaning in a way that frankly, is confusing. Essentially, the OTT buzzword is currently and wrongly used to describe any service delivered over IP. This defeats the purpose in having the OTT differentiation in the first place. If an operator offers an IP service (say IPTV), and that service is delivered over the operator’s infrastructure (whether mobile, fixed, or otherwise), it is NOT OTT. If that same operator, after building up the content/service model, extends the service to any IP end point on another operator’s network, then it becomes OTT. Whether the operator decides to use QoS for the service is irrelevant in the definition of OTT. In other words, an operator offering a service to its own subscribers is NEVER OTT; rather if quality is enforced, it is a managed telco service, and if not, it is an unmanaged telco service. Only if it is extended beyond the boundaries of that telco’s infrastructure is it ever OTT.
How can telcos play a role in OTT?
Technically the term Telco OTT refers to a telco offering services that likely were originally launched for its direct subs and then extended to any user globally. For example, if an operator happens to build an incredible content library, it would be short-sighted to limit this content to that operator’s subscribers only. Instead, the Holy Grail is to extend this as a real OTT player, and allow subscribers from any location, connection, operator, to subscribe. In this sense the telco is creating a new business which is effectively a real OTT provider that just happens to be built using telco dollars.
Can a telco actually build an OTT offering that’s competitive?
We’ve seen Vodafone close its doors to 360 a few years ago. Now Verizon has announced that it will cancel its mobile video service. In both cases this was an operator attempting to compete with OTT solutions by offering a competing solution. Unfortunately both were limited to their own subscribers so technically, as per the original OTT definition, neither were true OTT. Had they been agnostic as to the users of the service, they might have stood a chance. Instead telcos are reluctant to do so since they see OTT as a way to lure more subs onto their network, bringing us to a very key difference between real OTT players and telcos trying to do OTT.
How do business models differ between real OTT players and operator OTT?
Simply put, real OTT players are in the game to make money either off the content or service they are offering, or from advertising. Clearly the former is a better business model as it creates more stickiness with customers. Advertising based models tend to have a higher churning subscriber base as users jump from one service to the latest flavour of the month. Meanwhile, telcos do not see OTT as a legit sustainable business on its own. Instead, they use it to leverage their core business of selling bits. In fact, almost all new telco revenue strategies are founded in this basic principle and this is exactly why they are likely to fail. Since driving more subs and higher bandwidth is the key philosophy, it immediately means any telco OTT strategy is meant to create a walled garden, whether by altogether limiting the content and service to only their subs, or offering a better quality of service to only their subs. The very success of the OTT model is that it is location and technology agnostic, and transferrable. This means the subscriber has a relationship with the OTT provider directly and is free to access his subscription from any access, any time, and ultimately in any location. Changing this paradigm destroys OTT and hence referring to a telco-centric solution as OTT will be short-lived.
What are the opportunities for telco OTT?
As an industry, we need to drop the telco OTT terminology when referring to a solution that only exists to drive sub count and bandwidth usage. Telcos that actually create new business units, complete with their own P&L, pool of experts, and autonomous business model, and driven by selling the content or service itself rather than the access to it, can rightly consider themselves Telco OTT. Unfortunately succeeding will be difficult since there are already 1,000,000 iOS apps and 700,000 Android apps, and hundreds of content and service providers including Skype, Pandora, Hulu, Netflix, Facebook, etc. Rather than competing, telcos should focus on refining the OTT experience, meaning instead of offering an OTT service itself, the operator can find a way to deliver the same content or service in an enhanced way. In this sense the telco is taking real OTT and adding a “+” to the end. One example, that continues from Verizon’s exodus from mobile video, is Verizon’s commitment to continue to develop and support their mobile video discovery app. This application simply allows users to search more easily for mobile video content by aggregating results from Hulu, NBC, Netflix, ESPN, HBO and others; ultimately creating a starting point for mobile users looking to find content. In some ways the CSPs can be considered websites, and Verizon’s discovery application, the Google of mobile video.
What should be the starting point for telcos?
The low hanging fruit is carrier billing. In many parts of the world, credit card and bank account penetration is extremely low, making subscriptions or even basic one-time purchases very difficult for users. Carrier billing simply uses the existing pre or post paid billing mechanisms to allow subscribers to purchase “virtual” goods more readily. Telefonica, citing this exact issue of low credit card penetration, recently launched a carrier billing solution that includes Microsoft, Google, Facebook and Blackberry. Almost 90% of Tencent’s revenue comes from the purchase of virtual goods which include anything from songs and movies, to wallpapers, avatars, and in-game upgrades. But, if customers can’t pay, they can’t buy. In fact, carrier billing is the first step towards a full mobile money solution and can easily extend beyond virtual goods to include utility payments, in-store purchases, and even payroll remittance.
What about a telco API?
This sounds like a marvelous idea since telcos have some amazing assets. The problem is the development community has no idea what these assets are or how to make use of them. Simply opening up an operator API and inviting developers to share revenue won’t do the trick. First, no developer wants to limit himself to a development environment tailored to a single operator when there are already attractive revenue models offered by the likes of Apple and Google. In fairness, getting discovered can be a problem and so in the short term it may be attractive for a developer to offer their application in a telco marketplace first. Aside from carrier billing, the QoS and bandwidth management functions, which telcos look to as a huge value, will only attract a small handful of real-time service developers. Specifically, voice, video and audio may require some service tuning and hence an appropriate PCC API. More likely, the global OTT players will dominate this market making any localized development of real-time services even less likely. A telco API will have some significant hurdles that, if overcome, might provide a window for smaller, localized developers. Those hurdles include:
- Developing the API and SDKs which requires considerable investment
- Educating the development community on what the telco assets are
- Offering a very attractive revenue split with reasonable growth expectations
- A localized discovery mechanism to actually get that application in front of eyeballs
None of these fit within a typical operator’s comfort zone, and even then it assumes global applications don’t decimate any localized market opportunities first. It will be up to each telco to individually decide if it is worth the risk/reward and we can expect many to fail in the process as the current board coasts to retirement rather than takes potentially costly risks.
What if telcos don’t change their mindsets about OTT?
Telcos that continue to leverage OTT to simply drive subscriber growth or bandwidth sales can still play a role. In addition to carrier billing, the telcos can offer unique bundling with OTT content. For example 3UK and Verizon both offer a Skype over 3G service that does not contribute to the subscribers’ data usage. Another very common tie-up is subscription based music services which allow subs to use their normal mobile payment package to stream music to their portable device without counting towards data usage. In some parts of the world operators are struggling to get more data usage. This is often due to an education issue on part of the user base. As technologists we assume that subscribers with a smartphone will know what to do with it. I recall my first smartphone experience; as a newbie I was not a heavy Internet user. Instead, that habit developed over time as I learned about new applications and connected with friends and family using the same social tools.
How can telcos seed new users?
Many users won’t use an application that isn’t installed, so turning them into a mobile data user overnight won’t happen. Instead, telcos will need to tap into creative ways to drive usage including free trial periods to introduce users to data. Vodafone had a successful promotion in 2009 in which Facebook access was free for a month. Another approach to seed behaviour is to pre-install or provide a launch pad that has the most common applications for users. Today, smartphones rarely come with Pinternet, Instagram, Facebook, Twitter, Hulu, Netflix, Pandora pre-installed, yet those are the apps that define our current behaviours and are analogous to mobile data.
How can a new user, who has never experienced mobile Internet before, become a power user of one or more of these applications?
The operator could develop a launch pad program whereby users that download a specific application package receive free access for a month. This approach introduces new users to the most popular apps on the market and offers an attractive no-risk trial. Tencent uses a custom browser that once installed, provides the user with shortcuts to several key applications in addition to replacing the basic web browser. Using this approach, Tencent is able to control the entry point of the mobile Internet experience and leverage it for advertising, introducing new applications, etc.
What is the user’s happy place?
Making money means either selling the content or service (OTT), charging for the delivery or access to it (telco), or relying on marketing for ad revenue and pull-through opportunities. Telcos are unlikely to succeed in the former since it is so orthogonal to their current business mantra. Clearly the second opportunity is the telco’s bread and butter but this will quickly limit them to being a utility provider and leave little opportunity for creating user stickiness. It seems obvious that the 3rd opportunity stands the greatest chance of success as a new revenue stream since it bundles existing core services and brings together both worlds. Any time you control the user’s eyeballs, you control the user. Directly addressing the shortcomings of the Internet experience, whether by enhancing discovery of apps and services, simplifying a process such as billing and payments, or just making existing things work better, will draw the users in; and that will define the operator of the future.
How do we get started?
Operators need to be realistic about the risks and rewards of investments in the OTT space. We need to share with operators new business models as experts and consultants, and not as salesmen and engineers. We need to start understanding the other half of the equation and get out of our comfort zone and start mingling with the developers. I made a conscious effort earlier this year to start attending web meetups including Mobile Monday, Web Wednesday, Web Mob, and others. I have yet to meet a single telecom professional at any of these events. Meanwhile this pool of developers and entrepreneurs is educating each other and sharing ideas about how to rule the mobile Internet. I often ask the audience when I present how many of them attended the last web meetup. To date I have never seen more than 1 hand. If we want to play this game, we need to get in the game, and stop sitting on the bench telling everyone else how great we are.