False Hopes for Operators looking at OTT

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I recently read a consulting report regarding over the top services, and while it was a good read, I don’t agree with the author’s suggestion that telcos are offering tremendous value to data consumers yet are getting a smaller piece of the pie.

All technology decreases in price over time and new data networks are more cost effective to operate than ever. What is the real value operators give consumers beyond that? Today they typically provide nothing more than a pipe with unreliable bandwidth and a billing model that doesn’t align with any applications the consumer actually wants to use. The first thing operators need to recognize to survive is that they are no longer the kings, and they are not the reason consumers get online or buy devices.

As an aside, in 2000 the list of top 10 companies by market cap globally included 3 telecom operators and 2 telecom vendors. In 2012, there are no telecom vendors and only one mobile operator. Instead the current list includes Apple, Microsoft, and IBM (listed as information technology).

In the era of voice, the operator owned the service (i.e. their content being the spoken voice) and hence users subscribed to the operators’ service. For data, the users want access to OTT services and the Internet at large. In this model the operator is simply the connection. A data connection is not an extension or evolution of voice…it is a whole new beast. Thinking otherwise is like selling coke for years and then one day just selling the cans with no coke inside while someone else fills it. Does anyone really think a factory making bottles has the same business model as a company that actually uses those bottles to bottle beer?

Even more messed up is that the container we are providing isn’t even customized for the product inside. We’re selling data using archaic billing packages while consumers are starting to adopt monthly subscriptions for streaming movies, music, data storage, etc. So imagine someone subscribes to a coke service that includes 200 cokes per month (maybe this is Netflix or iTunes Match). First off we charge them separately for the can (the data connection), the bill for the can is paid through entirely different channels, and we don’t offer a matching package for 200 cans per month. Instead we let the coke drinker buy a bulk 100 cans, after which it depends on how quickly the coke arrives; and if the coke is drunk too fast, then we simply stop providing cans. Making things even worse is that even when there are enough cans, sometimes they are too small to hold a full coke and other times they are far too big and empty cans arrive even if no coke is in them.

Wouldn’t that be a crazy model?! And the solution doesn’t imply that the company that makes coke also has to make cans. Rather, the content can simply be packaged up as an ecosystem of different functions that include the sugar cane producers, the coke factory, the can producer, and the delivery man.

Telcos today, with false hopes instilled in part by we the vendors, seem to think they can simply start producing coke even though their strengths lie predominantly in making the cans and delivering them. Instead a better success formula is available which starts with telcos aligning their data packages around actual use.

Subscribers are starting to rely heavily on cloud services; many of which are free, but more emerging services are not. That means the subscriber of the future may have 2-5 monthly or yearly subscriptions for streaming music, video, data storage, etc; yet the operator, having no awareness of this simply throttles all those services when the user’s download cap is reached. 2-3 weeks into the month all those monthly services are unavailable and the typical subscriber doesn’t understand why.

Operators can start very simply by offering basic rated services which are never throttled so at least app usage isn’t impeded by the operator. Secondly, users in markets with low credit card penetration need a mechanism to buy virtual goods like apps from an app store or a movie title. Tie ups with operators from a simple carrier billing perspective make perfect sense.

Some OTT apps that will be the predominant subscription service make sense for the telco to partner with to offer carrier billing and data forgiveness (i.e. the data charges are waived since the subscriber is buying that particular application as a monthly or a la carte service already).

Any operator that thinks they can launch their own VoIP or IPTV service to compete directly with OTT apps is in for a rude awakening. OTT players have no investment in infrastructure and are much leaner with far different business models. They will always be able to undercut prices, forge better relationships with content producers, and create software solutions to address infrastructure issues with telco bandwidth, latency, etc.

Even services like RCS will likely be short-lived as users of the future will identify themselves solely with a user@myaddress.com ID and not a phone number at all, meaning there is no correlation between the user and operator. In this model, OTT services already provide better global interoperability, more functionality, and wider branding. Services of the future can simply be built on top of the Web Service framework which creates an abstraction layer between the sea of MBB and FBB networks, and the hugely scalable paradigms of web applications. The problem to solve is therefore no longer in the domain of the hardware based telcos and the sooner we realize it, the sooner we can solve it.

Here are some case-in-points off the top of my head:

There is little opportunity for telcos to play OTT king as an application owner; rather they can integrate the existing services better, foster the development community, and leverage customer satisfaction as a differentiator.

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