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

7/28/2019 Over-The-Top (OTT) Services: How Operators can overcome the Fragmentation of Communication

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Over-The-Top (OTT) Services:

How Operators can overcome theFragmentation of Communication

A report by Sponsored by

August 2012


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Table of contents

Information 3

Introduction 4

Executive summary 6 - 8

OTT evolution & fragmentation 9 - 12

Forecasts 13 - 18

The operator view 19 - 20


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The impact for operators: trafc & revenues 21 - 25

The operator response 26 - 29

Can operators make money from OTT? 30 - 31

Opportunities for operators 32 - 34


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Information

Sources

Mobile operators included in the OTT research are:

AT&T, EverythingEverywhere, T-Mobile Czech Rep.,

Orange LA, Telefonica Spain, Telenor, TeliaSonea,

Sprint, T-Mobile International, 3UK, Tigo, T-Mobile

UK, Bouygues Telecom, MTS, Vodafone Italy,

Turkcell, H3G Italy, Orange France, Zain, O2 UK,

Telekom, BanglalinkGSM, CYTA, Starhub, Maxis,

Telecable, Vodafone UK, Orange UK, T-Mobile Ger-

many, Vodafone Germany, Orange Poland

Nb: Not all operators wanted to be listed.

The 68 countries researched are:

China, India, us, Brazil, Indonesia, Russia, Japan,

Pakistan, Germany, Nigeria, Mexico, Italy, Bangla-desh, Philippines, UK, Vietnam, Egypt, Thailand, Iran,

Turkey, France, South Africa, Ukraine, South Korea,

Spain, Argentina, Poland, Colombia, Saudi Arabia,

Algeria, Taiwan, Romania, Malayia, Venezuela, Peru,

Morocco, Canada, Netherlands, Australia, Chile,

Guatemala, Portugal, Sri Lanka, Ecuador, Greece,

Czech Rep., Nepal, Sweden, Hong Kong, Austria,

Belgium, Hungary, UAE, Bulgaria, Israel, Finland,

Singapore, Denmark, Azerbaijan, Slovakia, Norway,Jordan, Ireland, Lithuania, New Zealand, Lebanon,

Estonia, Montenegro.

Methodology

Research was conducted by mobileSQUARED

during May and June 2012. The rst wave of operator

research was conducted in 3Q2011.

mobileSQUARED forecasts are based on

subscriptions, and not subscribers, and factors in

consumers owning more than one smartphone

device.

The forecasts are based on smartphone users

identied in the leading 68 mobile markets globally

(see above). Total mobile users and smartphone fore-

casts are from mobileSQUAREDs ongoing research

into the leading 20 mobile markets. The remaining 48

markets were researched as part of process for this

project.

Total OTT subscribers and OTT subscriber growth

is based on the average subscriber penetration as

identied by mobile operators during the research

process, and applied to the smartphone population in

each market. Both Skype and Whatsapp were

identied during the research process as the leading

OTT voice and messaging service provider, and

therefore provided the most visible use cases for theforecasting.

Voice trafc (frequency) is based on Skypes off-net

usage (including Skypes projected growth), and mes-

saging trafc is based on Whatsapp (including growth

during the forecast period).

Termination costs used in the forecast process are

based on a variable rate for off-net-to-xed calls,

ranging from $0.015, $0.025, $0.035, and a universal

rate of $0.06 for off-net-to-mobile calls, and a at-rate

of $0.01 for SMS.

INFORMATION


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The inevitability of the mobile sector is that voice

revenues are declining, and messaging revenues

will tread a similar path in the next year or two. Over

The Top (OTT) services are already having a major

impact on the mobile space, and this will only be

exacerbated in the future. OTT service providers are

shaking up the communications space and causing

considerable consternation along the corridors ofmobile operators around the world.

The debate of whether OTT services should be

considered a threat or opportunity is old hat. Mobile

operators will view OTT as an opportunity to generate

incremental revenues, the only question is when.

Operators openly facilitating an OTT strategy will be

able to explore the opportunities and enjoy the OTT

revenue pie considerably sooner than an operator

viewing OTT as an insurgent service.

This White Paper explores the Fragmentation

of Communication and focuses on how mobile

operators can capitalise on the OTT opportunity. It is

based on research conducted by mobileSQUARED

between May and June 2012 and incorporates

mobileSQUAREDs original OTT research from Q2

2011.

Introduction

INTRODUCTION


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The rapid adoption of smartphones has provided

consumers with access to a wide variety of

communication services which go beyond the

traditional services of voice and messaging provided

by mobile operators. Yet the majority of these

proprietary OTT (Over-The-Top) communication

service providers do not permit cross-platform

functionality and therefore limit the capability oftheir services. Consequently, the rise of these

OTT services has created an era of fragmented

communications in which consumers cannot easily

communicate outside the walled gardens of their

respective service/app. This weakness presents

mobile operators with an ideal opportunity to adopt

a key role in enabling OTT services and associated

revenues, as they seek new business models to

offset the decline in voice and messaging revenues.

The rapid adoption of smartphones

has created an era of fragmented

communications whereby

proprietary OTT service providers do

not permit cross-platform

functionality and therefore limit thecapability of the service.

Skype is leading the OTT charge with over 900

million users spending over 1 billion minutes a day

making peer-to-peer Skype-to-Skype calls (free) and

with its number of daily off-Skype minutes (charged to

mobile or xed-line) approaching 40 million minutes

per day. Skype has now become to OTT what

Facebook is to social media.

Similarly, Skype is to voice what WhatsApp is

becoming to messaging. Based on existing app

download data, mobileSQUARED estimates there

are 75 million WhatsApp users globally, and this

is projected to increase to 250 million by 2016.

Presently, WhatsApp users are sending 2 billion

messages a day, which equates to 27 messages per

user per day. By 2016, mobileSQUARED forecaststhe 250 million users to be sending 11 billion

messages per day (or 4 trillion per year), with an

average user sending 44 messages per day.

There are now multiple communication channels

open to users in particular smartphone users. By

2016, global smartphone penetration will stand at

39%, meaning over one third of population of mobile

users will be able to access OTT services via theirsmartphone. An iPhone user, for instance, can send a

message via SMS, iMessage, Facebook, WhatsApp,

Viber and Skype to name but a few. As OTT services

proliferate further, more companies and developers

will look to get in on the act, and ood the market with

OTT services. This period can be described as the

Fragmentation of Communication, and the mobile

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.

Mobile operators are concerned. Research by

mobileSQUARED reveals that:

79% of operators believe that OTT clients on

smartphones are a threat to traditional SMS- and

voice-based services.

73.7% of operators identied messaging as the

service most challenged by OTT.

Executive summary

EXECUTIVE SUMMARY


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73.7% of operators identiied

messaging as the service most

challenged by OTT.

57% of operators expect 11-40% of their

customer base to be using OTT services by theend of 2012.

42% of operators expect over 40% of their

customer base will be using OTT, while 50%

expect 21-40% of their users on OTT services.

100% of operators now believe voice and SMS

trafc over the mobile network will decline over

the next 5-10 years.

37% of operators believe the decline in voice andmessaging revenues will be 1-20%, and 53%

expect 21% and over almost double the number

of operators compared to the previous year.

However, despite the various concerns, most of

operators believe that it is possible to make money

out of OTT:

63% of operators believe they will make money

from OTT services, but only at the expense of

voice and SMS revenues. 16% of operators

believe they will generate incremental revenue

from OTT services.

Only 21% of operators either believe operators

cannot make money from OTT services or remain

undecided.

From a total global mobile subscription base of over

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.

Perhaps most notably for mobile operators, is that

OTT users in 2012 will only account for 2% of thetotal global mobile subscription base, and 18% in

2016.

OTT users in 2012 will account

for only 2% of the global mobile

subscription base, and 18% in 2016.

Messaging represents the largest off-net operatorrevenue generating community, with 118.9 million

users already sending paid-for messages this year,

jumping to 534.9 million users in 2016, according

to mobileSQUARED forecasts. This is followed by

OTT-to-mobile voice users: 68.6 million users in 2012

rising to 434.7 million in 2016. And then OTT-to-xed

voice users: 49.8 million rising 132 million in 2016.

Off-net-to-video users are expected to grow from 2.96

million in 2012 to 215.7 million in 2016 as the videocommunications bug sweeps the globe.

mobileSQUARED forecasts the OTT market to be

worth US$166.5 billion in 2016, but its impact is

already being felt by mobile operators today. The

forecasts include OTT messaging services costing

mobile operators US$4.2 billion in 2012, rising to

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 forecast

Executive summary

EXECUTIVE SUMMARY


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period through a combination of OTT and competitive

price erosion.

Embracing OTT should not be viewed by the mobile

operator community as a way of substituting the

decline in voice and messaging revenues, but as

a means of delivering a new incremental revenue

stream that will experience exponential growth in thelong term. After all, consumers are embracing OTT

services in their hundreds of millions leaping to

billions within a few years. It is consumers opting for

multiple communication alternatives that have created

this Fragmentation of Communication. It is this factor

that will ultimately open the door of opportunity for

mobile operators.

Embracing OTT should be viewed bymobile operators as a way of

delivering a new incremental

revenue stream that will experience

exponential growth in the long term.

Operators should focus on a multiple OTT strategy

founded on developing a long-term relationship with

the customer. Operators have a wide range of options

to tackle the OTT opportunity:

Blocking OTT: short-term strategy that

will ultimately limit the revenue-generation

possibilities for the operator.

Retaining billing relationship/data charges:

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

amount of users that would use a rival OTT

service, it fails to present a compelling OTT off-

net based revenue-generating model.

Partnering directly with OTT players: operators

can partner directly with the likes of Skype,

Google, etc., and benet from their trafc.

However, this will probably benet the larger

operators.

RCS-e/Joyn: the GSMA-led initiative is very

long term and whilst operators prepare to deploy

RCS-e, operators can adopt other initiatives in

parallel.

Third party access to OTT via mobile phone

numbers: mobile operators can position

themselves as the bridge between OTT off-net

trafc and the mobile customer and remove allwalled gardens by using the mobile number. This

enables the operator to keep the trafc and gain

a share of the revenues.

mobileSQUARED forecasts that OTT commun-

ications 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.

Messaging will dominate the revenue landscape

over the forecast period, followed by off-net calls to

mobile, while the contribution made to off-net xed

line calls is negligible. Therefore, the incremental

revenues generated from OTT interconnectivity

will reduce the annualised decline in voice and

messaging revenues (US$30 billion) by over 25%.

EXECUTIVE SUMMARY


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OTT evolution & fragmentation

OTT waves of activity

The OTT communications story has been well

documented in recent years, but in order to grasp

how it will continue to redene the industry, it is

necessary to understand its progress to date.

OTT has developed in two waves: Firstly, it was xed

voice services, and especially international calling,

that provided the route to market for OTT service

providers like Skype and Vonage, using IP-based

voice services to massively undercut the existing

operator rates. The second wave of OTT growth was

borne out of the rise of smartphones and the ability to

package OTT services as apps that could be installed

as a client on the device. This latest wave not only

supplemented existing xed-line activity, but hastargeted mobile voice, messaging, and most recently

video.

OTT has developed in two waves: ixed

voice services, especially international

calling, and OTT packaged in

a smartphone app targeting mobilevoice, messaging and video.

Leading the OTT charge is Skype. MobileSQUARED

research reveals that the Microsoft-owned company

now has over 900 million users and towers over

alternative telecoms service providers such as

Vonage at around 3 million users. To put this into

perspective, Skype has a similar user base to

Facebook. Skype then, is a behemoth in the OTT

space.

Interestingly, Skype claims that it has up to 65 million

users logged on and using the service simultaneously

at any given time during the day though online

Skype acionados Skype Numerology claims this

number has only recently peaked at 42 million.

Regardless, even with the latter gure it represents

an active online community similar to the size of

Spain, one that is large enough to have a signicantimpact on the communications industry.

Skype has disclosed that its users spend over 1

billion minutes a day making peer-to-peer Skype-to-

Skype calls (free), and the number of daily off-Skype

minutes (charged to mobile or xed-line) is 30 million

as of September 2011, though mobileSQUARED

estimates this gure to now be 35-37 million minutes

per day. While the latter is generating revenue forthe telco industry by way of interconnection (or

termination) fees, the former is clearly subverting

revenues from telcos.

On the back of Skypes success, a number of rival

service providers have emerged, most notably

Google Voice, though minimal information has

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 has

become the dominant force in the OTT xed-line

space.

The perceived threat of OTT services by mobile

operators is undoubtedly real, and now being

confounded by this next wave of smartphone-

based OTT apps. One of the original OTT services

OTT EVOLUTION & FRAGMENTATION


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on mobile was RIMs BlackBerry Messenger. Until

recently BlackBerry had 75 million users worldwide,

but it is now haemorrhaging users at an alarming

rate as its users hot leg it over to Android or iOS.

Apple has recently

conrmed that it is

now approaching

350 million iOSdevices globally, with

iPads accounting

for 60 million

devices. That means

a potential (and

growing) user base

of 350 million for

iMessage.

Amid growing speculation, RIM is believed to

be considering splitting off its messaging and

email platform from its hardware division. If that

development happens, it could stand to gain lots of

adopters in corporate circles to run its services as

apps on other smartphone platforms.

The OTT walled gardensThe lack of cross-platform connectivity between

BBM and both iMessage and Facetime on iOS, for

example, are synonymous with the fragmentation

associated with the mobile industry, and sties

the impact OTT could have on mobile trafc and

revenues. As yet, a proprietary messaging-based

service has not been developed exclusively for

Android users, which means the 300 million Androiddevices globally (around 13 million Android tablet

users), and the 850,000 users being added every day

according to Google recently can download any

of the OTT services available.

The lack of inter-device and platform interoperability

was explicitly highlighted in 2011

when RIMs BBM network dropped

for a number of days, preventing

its users from connecting thoughbasic voice and SMS services

were unaffected. Intriguingly,

BBM originally set a messaging

OTT precedent for its alternative

proprietary SMS solution, but

because the service is inextricably

linked to the Blackberry devices

which are experiencing an alarming decline in

sales and suffering from the greater appeal of Appleand Android devices BBM looks to fall victim of

its self-imposed walled garden. A similar outcome

could one day befall Apple and iMessage. While this

appears unlikely right now, the same could be said

of RIM several years ago, and clearly demonstrates

the compelling need to provide cross-platform

interoperability.

In fact, the same can be said of Skype, but to date its

xed-line dominance is yet to translate in the mobile

arena. All the while, new talent is emerging and

developing incredibly strong and loyal followers, such

as WhatsApp and Viber. And thats before the likes of

Facebook and its Messenger service gets a mention.

As is customary with proprietary OTT services,

interoperability can be considered their shortcoming.

Indeed, we have identied three main areas of

interoperability:


The lack of cross-platform

connectivity between BBM and both

iMessage and Facetime on iOS aresynonymous with the fragmentation

associated with the mobile industry,

and stiles the impact OTT could have

on mobile trafic and revenues.


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1. The lack of device/OS interoperability (BBM,

iMessage)

2. The lack of app interoperability (WhatsApp, Viber)

3. The lack of interoperability with featurephones

and non-IP-based devices.

A lack of interoperability is a keyshortcoming in OTT services, creating

self-imposed walled gardens, which

limit their reach.

Anyone with a smartphone can download WhatsApp,

and therefore overcome the cross-platform limitations

offered by BBM and iOS. However, the verticallimitations of one model are only rotated 90 degrees

to the horizontal model of WhatsApp, whose users

can only connect and send free messages to fellow

WhatsApp users. To date, there is no option to go

off-net, or in this case, Off-What. Whether looking

at OTT from a vertical or horizontal perspective, each

service has constructed what is more commonly

referred to as a walled garden.

Based on existing app download data,

mobileSQUARED estimates there are 75 million

WhatsApp users globally, and this is projected to

increase to 250 million by 2016. Presently, WhatsApp

users are sending 2 billion messages a day, which

equates to 27 messages per user per day. By 2016,

mobileSQUARED forecasts the 250 million users

to be sending 11 billion messages per day (or 4

trillion per year), with an average user sending 44

messages per day.

Though coming from a smaller footing, Viber too is

on the march. Between February and May 2012, the

company leapt from 50 million users to 70 million,

generating over 1 billion minutes and sending over 1

billion texts per month.

In South Korea, OTT messenger app KakaoTalk

has been downloaded by almost every smartphoneuser there will be 42 million by the end of 2012, and

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 crossover

between the services. And this does not even

account for Facebook, which has around 500 million

mobile users globally. However, while in all probabilitythe majority of WhatsApp and Viber users are highly

likely to be on Facebook also, the penetration of

Facebook Messenger among its mobile users is

believed to be low.

The Fragmentation ofCommunication

There are now multiple communication channelsopen to people in particular smartphone users. An

iPhone user, for instance, can send a message via

SMS, iMessage, Facebook, WhatsApp, Viber and

Skype to name but a few. As OTT services proliferate

further, more companies and developers will look

to get in on the act, and ood the market with OTT

services.




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As OTT services proliferate further,

more companies and developers will

lood the market with OTT services,

further fragmenting communications.

If we regard the development of social networking as

an indication for the development of the OTT market,

it is worth remembering that there was a seemingly

endless ow of sites emerging until Facebook shone

through and established itself as the principal social

network. Presently, niche social networking sites are

cropping up and targeting smaller, less-catered for

audiences. A similar pattern is likely to happen in the

OTT space. Whether Skype and WhatsApp end up

as the eventual market leaders remains to be seen,but it seems likely at this point.

Nevertheless, this period can be described as the

Fragmentation of Communication, and the mobile

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.

For instance, the majority of these services do

not provide cross-OTT platform functionality, and

therefore operate within the connes of a walled

garden. While operators can use the lack of

interoperability across disparate OTT services to

potentially provide a strategic advantage, they too

have their limitations brought about by the need to

interconnect with other operators. This too could be

costly to operators.

The rise of Skype has conrmed the globalisation of

communications: international calls are no longer the

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.

To meet the demands of global communications,operators must also ensure their global footprint is

as far-reaching as possible. With over 850 mobile

operators globally, that represents a lot of roaming

agreements: the average operator has between 150

and 400 roaming agreements. If operators are to use

global reach to their strategic advantage to address

the mounting threat from OTT services, then they

too must limit any walled gardens within their direct

community and ensure their international footprint forthe delivery of both voice and SMS is as extensive as

possible.

Operators must limit any walled

gardens within their direct community

and ensure their international

footprint for the delivery of both voiceand SMS is as extensive as possible.

The globalisation of affordable (and free)

communications by the OTT players provides the

operators with a limited window of opportunity.

And this is only going to be squeezed as the OTT

threat is exacerbated with the continued adoption of

smartphones.




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Forecasts

Smartphone forecasts

To consolidate this point, across the 68 smartphone

markets covered in this White Paper, there will be

1.12 billion smartphone users by the end of 2012,

rising to 2.9 billion in 2016, by which point global

smartphone penetration will be at least 39% of total

mobile users. There is a strong correlation between

smartphone users and OTT services, conrming

that consumers are nding a free or cheaper

communication alternative very appealing.

There will be 1.12 billion

smartphone users by the end of 2012,

rising to 2.9 billion in 2016, achieving

a penetration of approximately 39% of

total mobile users globally.

A survey exploring OTT adoption rates among US

smartphone users by Acision reveals that Facebook

is used by 37% of users, followed by Skype (17%),

Twitter (17%), iMessage (11%), BBM (10%)

and WhatsApp (5%). Consequently, OTT-based

messaging services are being used in conjunction

with SMS across the US, where SMS is bundled with

data packages.

OTT-based messaging services

are being used in conjunction with

SMS across the US.

This essentially makes SMS a sunk cost to

subscribers, so users do not need to stop using them

for sending messages nationally.

A survey of UK smartphone users by

MyVoucherCodes revealed that 81% have

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%. Whats more, the survey claims that

40% of smartphone-based OTT service users have

shifted their messaging trafc partially or completely

away from SMS.

While on rst inspection this gure should send

shivers down every mobile operators spine, anoverlooked eventuality is that consumers have

already paid for messaging (and voice) services as

part of their monthly bundled package of which

the majority of smartphone users are on in most

of the developed mobile markets. For example, in

2011 KPN revised its prepaid tariffs by reducing the

number of included monthly minutes and increasing

the available data in order to meet the changing

demands of consumers.

FORECASTS

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED , 2012


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OTT market forecasts

From a total global mobile subscription base of over

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 (FIG 2).

The total number of OTT users on

smartphones will rise from 276.8

million in 2012 to 1.32 billion in 2016.

FIG 2 TOTAL MOBILE UNIVERSE

SOURCE: MOBILESQUARED, 2012

As of 2012, 20% of global smartphone users are

actively using OTT services, and this will reach

45% by 2016, though this could be considered a

conservative estimate, as the impact of the network

effect could likely accelerate this number. Perhaps

most notably for mobile operators, is that OTT users

in 2012 will only account for 2% of the total global

mobile subscription base, and 18% in 2016.

As of 2012, 20% of global smartphone

users are actively using OTT services,

and this will reach 45% by 2016.

FIG 3 PERCENTAGE OF OTT USERS IN 2012

AND 2016


OTT users in 2012 will only account

for 2% of the total global mobile

subscription base, and 18% in 2016.

According to the mobileSQUARED research, in

general operators expect (FIG 3):

In 2012:

Almost one-third of operators expect 1-10% of

their customer base to be using OTT services

by the end of 2012.

57% of operators believe 11-40% of their

Forecasts

FORECASTS


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While the mobileSQUARED OTT research reveals

that virtually every OTT smartphone user will

use the available messaging and voice services,

mobileSQUARED has broken down those forecasts

to reveal the extent of those users that will send off-

net communications and will ultimately generate

revenues for operators.

FIG 4 OTT SMARTPHONE USERS

BREAKDOWN BY SERVICE


This means (see FIG 4):

Messaging represents the largest off-net

operator revenue generating community, with

118.9 million users already sending paid-for

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 million

in 2016.

OTT-to-xedvoice users will grow from 49.8

million to 132 million in 2016.

Forecasts

customer base will be using OTT services,

leaving 10.5% of operators anticipating more

than 40% of the user base on OTT services in

2012.

In 2016:

Every operator expects over 11% of their

customer base to be using OTT services.

In fact, 42% of operators believe over 40%

of their customer base will be using OTT

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 be

using OTT services within three years. In fact, almost

50% of European operators expect over 40% of their

subscriber base to be using OTT by 2016. In North

America, the expectations are lower, with operators

split between 11-20% and 31-40%. In both Asia and

Latin America, operators expect more than 40% of

users on OTT services in 2016.

42% of operators believe over

40% of their customer base will be

using OTT services in 2016.

This data highlights the ease by which OTT players

will be able to access mobile operator customers,

and shows their concern around the perceived threat

of alternative services.

FORECASTS


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Forecasts

Off-net-to-video users are expected to grow

from 2.96 million in 2012 to 215.7 million in 2016

as the video communications bug sweeps the

globe.

Messaging represents the largest

off-net operator revenue generatingcommunity, with 118.9 million

users already sending paid-for

messages in 2012, jumping to

534.9 million users in 2016.

Research for this White Paper has revealed that calls

to mobile phones now dominate total voice trafc

across the developed world, and this has therefore

been reected in the larger number of OTT-to-mobile

users compared to OTT-to-xed users.

It is also worth noting, that as more smartphone

users download OTT service apps, the potential off-

net community diminishes, and explains why OTT

user growth is signicantly higher than OTT to off-net

activity growth.

Outlook for selected markets

United States

The number ofsmartphones in the US will grow

by 110 million over the 2012 to 2016 forecast

period, with 155.6 million smartphones in 2012

rising to 265.8 million in 2016.

Total OTT users are projected by

mobileSQUARED to total 47.5 million and grow to

139.5 million by 2016.

The number of OTT users sending off-net

messages will increase from 26.1 million to 63

million over the forecast period. While the number

of users making off-net mobile and xed line

calls will rise from 13.3 million and 8.5 million

respectively, to 55.6 million and 14 million.

FIG 5 OTT REVENUES IN THE UNITED STATES

SOURCE: MOBILESQUARED , 2012

Total OTT users in the US are

projected to total 47.5 million in 2012

and grow to 139.5 million by 2016.

In addition:

Off-nettrafcwillgeneraterevenues in the US

of US$795.9 million in 2012 rising to a fraction

over US$1 billion in 2016.

While OTT-to-xedcallrevenueswill be

negligible over the forecast period, off-netmessaging will generate US$643.1 million and

US$756 million in 2016.

FORECASTS


17/35PAGE 17

Forecasts

Revenues generated from OTT off-net calls

to mobile will treble from US$71.1 million to

US$245.6 million.

Germany

Despite a slow start in smartphone adoption,

Germany is more than making up for it, with the

number of smartphones almost doubling from 49

million in 2012 to 97.3 million in 2016.

The total number of OTT users is expected

to leap from 14.9 million to 51.1 million over the

forecast period.

OTT users sending revenue generating off-net

messages will grow from 8.2 million in 2012 to

20.4 million in 2016.

The number of OTT users making off-netxed

calls will rise from 2.7 million in 2012 and 5.1

million in 2016, while those users making off-net

mobile calls will leap from 4.2 million to 20.4 million.

FIG 6 OTT REVENUES IN GERMANY


Total number of OTT users

in Germany is expected to leap

from 14.9 million in 2012 to

51.1 million in 2012.

In addition:

The total OTT off-net opportunity in Germany

will be worth US$250.5 million in 2012 and

US$366.7 million in 2016.

Revenues from off-net messaging will

dominate, generating US$202.4 million in 2012

rising to US$276.8 million in 2016.

Combinedxedandmobileoff-netcallswill

generate total revenues of US$48.1 million in2012 and US$89.9 million in 2016.

UK

The OTT projections are based on strong

smartphone growth, with mobileSQUARED

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 signicant growth of the number of

OTT users making off-net calls, from 3.7 million

in 2012 and 14.8 million in 2016.

A number that is considerably higher than those

users making off-netcallstoxedline: 2.4

million rising to 3.7 million in 2016.

FORECASTS


18/35 PAGE 18

Forecasts

OTT penetration in the UK will almost

treble during the forecast period, from

13.2 million to 36.9 million.

FIG 6 OTT REVENUES IN THE UK


In addition:

The UKs OTT off-net market will be worth

US$264.9 million in 2016, up from US$220.6

million in 2012.

Off-nettrafctoxed-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


19/35PAGE 19

The operator view

The mobile operators are right to be concerned about

OTT services. Research by mobileSQUARED in May

and June 2012 reveals that 79% of operators believe

that OTT clients on smartphones are a threat to

traditional SMS- and voice-based services.

79% of operators in 2012 believe thatOTT clients on smartphones are a

threat to traditional SMS- and

voice-based services.

That is a lot of operators, but is actually down from

83.8% compared to a similar study conducted by

mobileSQUARED last year (see FIG 8).

FIG 8 ARE OTT CLIENTS A THREAT TO

TRADITIONAL OPERATOR SERVICES?

In 2012, a regional breakdown highlights that 100%

of mobile operators in North America, Latin America

and Asia agree or strongly agree with the threatposed by OTT. Similarly, the number of operators

that are either unsure or disagree with the threat


to traditional SMS- and voice-based services, has

increased from 16.2% in 2011 to 19.1% in 2012.

This perhaps highlights that a small percentage of

operators are now approaching OTT with a certain

level of pragmatism, and starting to understand

the opportunities posed by OTT, rather than just

perceiving it as a threat.

FIG 9 WHICH ELEMENTS OF OPERATOR

SERVICE TRAFFIC WILL BE MOST THREATENED

BY OTT CLIENTS?

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 signicant

threat to their voice and SMS trafc and revenues.

That gure has leapt to almost 32% in 2012, a year-

on-year increase of 134%.

The research maintains that SMS continues to

be the standout concern for operators. In 2011,67.6% of operators identied messaging as the

most challenged service by OTT, but that gure has

increased to 73.7% in 2012.


THE OPERATOR VIEW


20/35 PAGE 20

With voice commoditisation now widely regarded as a

given across the telco industry with or without OTT

services the challenge of OTT to voice services

appears to be waning according to the operators,

with 18.9% of operators believing voice was the most

threatened in 2011 falling to 10.5% just 12 months

on.

In 2011, 67.6% of operators

identiied messaging as the

service most challenged by OTT,

but that igure has increased

to 73.7% in 2012.

When it comes to video calling as a direct service,

such as Tango, Skype and Facetime, operators do

not expect OTT to have any impact, though Other

as a service category representing all operator

service trafc of voice, video and SMS, increased

between 2011 and 2012 from 5.4% to 15.8%.

The operator view

THE OPERATOR VIEW


21/35PAGE 21

The impact for operators:trafic & revenues

The operator survey by mobileSQUARED collected

information on what the impact that operators have

already seen in trafc and revenues, as well as the

future impact (5-10 years).

Trafic

It is inevitable, with so many OTT users, that this

will impact on operators trafc, and subsequently,

revenues, but the extent of how much remains to be

seen. Regardless of the bearer, which could be IP,

packet switched or circuit switched, the trafc will still

require transporting, which means that it will actually

be the revenue associated with carrying the trafc

that will be impacted.

FIG 10 HAS TRAFFIC DECLINED IN THE LAST

12 MONTHS AS A RESULT OF OTT?

The impact OTT services are having on operator

trafc is clearly expanding (see FIG 10):

In 2011, 37.8% of operators had not seen

operator trafc declining, but that number has

since fallen to 26.3% of operators in 2012. That


means OTT is now affecting trafc for almost

three-quarters of operators.

The research also shows that 42.1% of operators

had an impact coming from OTT of 1-10% of

trafc in 2012, up from 29.7% in 2011. Just over

10% of operators state that OTT has impacted on

11-20% of their trafc in 2012, compared to no

operators in 2011.

OTT is now affecting trafic for

almost three-quarters of operators:

26.3% of operators have seen trafic

declining in 2012.

In 2011, 2.7% of operators said that OTT was affec-

ting 21-30% of their trafc, yet in 2012 not one opera-

tor said over 21% of their trafc was affected by OTT.

Interestingly, 29.7% of operators were not aware of

the impact OTT was having on their trafc 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-

on, the North American and Asian operators, as well

as 15% of European operators, were yet to determi-

ne whether OTT had had an impact on their trafc.

Around 25% of European operators said OTT had not

affected trafc, while 45% said between 1% and 10%

of trafc had been lost. Just under 10% of Europeanoperators said between 11% and 20% of their trafc

had been lost to OTT.

THE IMPACT FOR OPERATORS: TRAFFIC & REVENUES


22/35 PAGE 22

The operator research reveals that 100% of opera-

tors now believe voice and SMS trafc will decline

over the next 5-10 years, compared to 90% of ope-

rators in 2011 (see FIG 11). Most intriguingly is that

more operators now expect OTT to have a greater

impact on trafc in the future, than they did in 2011:

Around 46% of operators in 2011 believed trafc

levels would drop by 1-20% in 5-10 years time,

and 27% anticipated a trafc decline of 21% and

over.

But in 2012, 37% of operators believe the decline

will be 1-20%, and 53% expecting 21% and

over almost double the number of operators

compared to the previous year.

100% of operators now believe

voice and SMS trafic will decline over

the next 5-10 years, compared to 90%

of operators in 2011.

FIG 11 WILL TRAFFIC DECLINE IN THE NEXT5-10 YEARS DUE TO OTT?


In 2012, 31.6% of operators

claim OTT is yet to impact on

traditional revenues.

Taking operators out of their comfort zone and asking

them to predict the impact of OTT over the next

5-10 years provides a great variety of responses.

For instance in North America operators are bracing

themselves for a trafc loss of up to 30%, as are

around 10% of operators in Europe. A little over 20%

of European operators expect more than 41% of their

trafc to migrate on to OTT. Similarly, 20% of Euro-

pean operators expect a trafc shift of up to 20% on

to OTT, as do the majority of operators in Asia.

Revenues

In 2011 only one-third of operators had experienced

a decline in revenues as a direct result of OTT, but in

2012 that had doubled, leaving just 31.6% of ope-

rators claiming OTT was yet to impact on traditional

revenues (see FIG 12).

FIG 12 - HAVE REVENUES DECLINED IN THE

LAST 12 MONTHS AS A RESULT OF OTT?





23/35PAGE 23

FIG 13 - WILL REVENUES DECLINE IN THE NEXT

5-10 YEARS DUE TO OTT?

About 18% of European operators are expectedto put up a stoic ght against OTT services, by

claiming the next-generation services will not impact

on current operator revenue levels. This is in stark

contrast to almost 75% of European operators that

do anticipate an impact revenues; 10% are bracing

themselves for more than 21% of revenues lost to

OTT, with the majority anticipating between 11-15%

lost.

North American operators are split between

uncertainty and more than 21%, while Asian

operators are sitting in the middle expecting a

revenue decline of 11-20%.

Over 45% of European operators are yet to see a

decline in revenues as a result of OTT, as are the

majority of operators in North America and Latin

America. Around 25% of operators in Europe have

seen revenues decline by up to 5%. Just over 10% of

operators claim more than 6% of their revenues have

been lost to OTT.

43% of operators expect

11% and over of revenues to

be hit due to OTT.

Given that operators believe the impact of OTT on

trafc has increased from 2011 to 2012, it is not

surprising that operators now believe OTT will have

a greater impact on their traditional revenues (see

FIG 13):

In 2011, 54% of operators believed OTT would

impact 1-10% of operator revenues in the next

5-10 years, with an additional 16% believing that

the impact would be 11% and above.

Jump forward 12 months, and the landscape has

changed considerably. Almost 32% of operators

expect 1-10% of revenues to be impacted by OTT

services, with 43% expecting 11% and over of

revenues to be hit up by a staggering 169%.





24/35 PAGE 24


Forecasts on the inancial impactof OTT for operators

The ultimate question remains: what is the nancial

impact of OTT on the communications industry? To

analyse this, we needed to look at the total mobile

market:

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

be worth US$1.97 trillion in 2016.

In 2012, the mobile industry (made

up of voice, messaging, VAS & access,

devices, infrastructure and OTT) will

be worth US$1.5 trillion.

During this period (see FIG 14):

Voice revenues will drop from US$714 billion to

US$573 billion.

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 toUS$407 billion.

In total, the mobile operators core services will

generate revenues of US$1.114 trillion in 2012,

and US$1.15 trillion in 2016.

FIG 14 MOBILE MARKET FORECASTS

Over the 2012-2016 forecast period, data revenues

will offset the decline in voice and messaging

revenues, which will be attributed to OTT directly and

indirectly (see FIG 15). Chetan Sharma says the total

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 canaccount for the decline in mobile operator revenues?

The total OTT market will be worth

US$59.8 billion in 2012.




25/35PAGE 25

economics and technological advancements, in

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

REVENUES

For example, total global messaging ARPU will

be worth $35.2 per annum in 2012 and $23.35 in

2016,based on Sharma and mobileSQUARED

data (see FIG 16). If we then apply this gure to

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 potentially

cost mobile operators US$41.9 billion in lost SMS

revenues.

OTT has been a driving force, along

with competition economics and

technological advancements, indisintermediating some US$182

billion in the operator market.

FIG 15 TRADITIONAL MOBILE REVENUEGENERATION FORECASTS

As already identied earlier in this White Paper,

services such as Skype are shifting billions of dollars

of voice trafc away from the mobile operators each

year. Can the same logic be applied to messaging?mobileSQUARED in fact believes that the impact of

OTT messaging services on messaging revenues is

signicantly less than previously thought.

Total global messaging ARPU will be

worth $35.2 per annum in 2012 and

$23.35 in 2016.

The impact of OTT on voice is very transparent (see

FIG 15). Over the 2012 to 2016 forecast period, total

mobile voice revenues will fall from US$714 billion

to US$573.51 billion. The cumulative loss over that

period to the mobile industry is US$140.5 billion.

When combined with the loss of messaging over theaforementioned forecast period (see FIG 16), OTT

has been a driving force, along with competition






26/35 PAGE 26

The operator response

At Mobile World Congress 2012, the chairman of the

GSMA and CEO of Telecom Italia, Franco Bernabe,

told delegates that OTT players hinder competition

by relying on non-standardized technologies, placing

a signicant burden on mobile operators. He also

claimed that the fall in ARPU across Europe from 26

in 2006 to 20 in 2011 was increasing the pressure

on operators looking to invest sizeable sums innext-generation networks, to largely cater for OTT-

generated trafc. US operator AT&T used the mobile

showcase event to disclose that it is looking at ways

of ensuring app developers pay for the trafc their

apps generate. OTT is extremely high on operators

agendas.

The majority of operators havelong -since responded to the threat

of OTT to their voice trafic by

introducing low-cost VoIP-based

national and international call

services, requiring consumers

to dial a preix to activate the service

on the operators network.

Because of the emergence of data heavy sites

such as Youtube, and video-on-demand catch-up

services like the BBC iPlayer, these are generating

massive amounts of trafc, yet operators see none

of the revenues but face the burden of building

infrastructure to support this.

Yet responding to the challenge of OTT is not a

recent phenomenon. The majority of operators have

long-since responded to the threat of OTT to their

voice trafc by introducing low-cost VoIP-based

national and international call services, requiring

consumers to dial a prex to activate the service on

the operators network.

Yet it is the impact OTT is having on messaging

that is most alarming. Netherlands incumbent KPNannounced earlier this year that it will lay-off 5,000

employees as an austerity measure attributed to

the growth of OTT messaging apps which continue

to reduce SMS trafc 15% year-on-year. While

WhatsApp which is particularly prevalent in the

Netherlands cannot be picked out as the sole

contributory factor to this decline, it is undoubtedly

one of the key reasons. The strategy of thwarting

this impact on revenues is entirely understandable,prompting some operators, such as TeliaSonera in

Sweden, to block OTT services or to place a premium

on their customers using the service.

If you cant beat em, join em

But if you cant 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 in

various ways, mostly by direct

partnerships with OTT players,

creating their own telco app and

investing in Joyn/RCS-e.

THE OPERATOR RESPONSE


27/35PAGE 27


Other operators are challenging the likes of

WhatsApp by launching their own take on the

service: T-Mobile USA has launched Bobsled, and

Telefonica has introduced Tu Me, both of which offer

free voice and texts. Bobsled has attracted over 1

million users globally, with 95% of these users not

T-Mobile subscribers, whilst Telefonica is striving

for a similar impact. Telefonica Digitals Tu Me appuses a customers data plan and allows not only O2

customers, but any smartphone user, to make calls,

send voice messages, instant messages, photos and

location from one control within one screen. Whats

more, it lets users make free calls internationally if

they use wi, and will automatically search existing

contacts for other Tu Me users. Telefnica Digital

claims Tu Me puts all your communications needs

into one place, for free, and is a great way for peopleto stay in touch with those close to them.

To counter the dominance of KakaoTalk in South

Korea, mobile operators SK Telecom, KT Corp and

LG Uplus have joined the GSMAs Joyn initiative

and will deploy Rich Communication Services-

enhanced (RCS-e) during the second half of 2012,

joining the likes of Orange, Vodafone, Telefonica,

Telenor and T-Mobile.

Hindering a consumers access to OTT

services, either through a paywall or

blocking, will ultimately prove

deconstructive and drive churn.

Clearly a number of operators are exploring OTT

options, while others are moving in the opposite

direction and confronting the issue. mobileSQUARED

believes hindering a consumers access to OTT

services, either through a paywall or blocking, will

ultimately prove deconstructive and drive churn.

While there is no evidence to support this

assumption, experience from the mobile industrysuggests that consumers will leave existing operators

for something they cannot have. And that is precisely

why AT&T and O2 paid a premium to secure

exclusive deals with Apple for the early days of the

iPhones release in order to attract customers from

rival mobile operators who had their eyes set on

owning an iPhone.

The iPhone had mass consumer appeal. And froma service standpoint, so does OTT. The problem

between the two is that the benet to the bottom line

is transparent with the iPhone, whereas this is not the

case with OTT services. This is certainly reected in

our operator research, which reects their disparate

response to OTT.

In 2011, the traditional (or standard) operator

response to combat OTT clients was to say they

were generating revenues from data. Last year,

almost 50% of operators believed this to be true, but

in 2012, that number had almost halved to 26.3%.

Operators, it appears, are starting to respond to OTT

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,



28/35 PAGE 28

In fact, 25% of operators had a very similar dual OTT

strategy: This was to roll out IMS/LTE to offer RCS/

RCS-e while also partnering with OTT providers.

While none of the operators divulged additional

information during the research process, they clearly

see customer value in not delaying access to OTT

services, and most likely, would pursue a strategyof migrating the customer onto their own RCS/

RCS-e service once IMS/LTE has been deployed.

This could, however, prove a risky strategy given

that OTT service providers are developing a tried

and trusted user community. An operator trying to

migrate established Skype users onto its in-house

OTT service would be the equivalent of an operator

developing its own social network and targeting

Facebook users, such as Tuenti in Spain or Vodafone

360.

47% of operators are rolling out

IMS/LTE and will be able to offer

uniied communications by way

of RCS and RCS-e.

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, compared


and could unquestionably result in churn as users

seek alternative operators that are responding to OTT

in a more constructive manner.

The number of operators blocking

OTT services has almost doubled from

5.4% in 2011 to 10.5% in 2012.

For example, the mobile operator research highlights

that a little over 47% of operators are rolling out IMS/

LTE and will be able to offer unied communications

by way of RCS and RCS-e.

In Europe, Telefonica, Vodafone and Orange have

all made commitments to RCS-e. Over one third

of operators have launched their own OTT-based

clients, and almost one-third of operators have

partnered with OTT providers.

FIG 17 WHAT ARE OPERATORS DOING TO

COMBAT OTT CLIENTS?




29/35PAGE 29


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 similar

dual OTT strategy: This was to rollout

IMS/LTE to offer RCS/RCSe while alsopartnering with OTT providers.

This perhaps most saliently highlights the power-

shift occurring in the operator space. Operators are

in a Catch 22 scenario; they are not in a position to

prevent customer usage of third-party services where

they do not participate in the revenue ow, as thiswould leads to a mass exodus of customers, leaving

them with little option other than to provide access to

these services.



30/35 PAGE 30

operators expecting revenues at the expense of voice

and messaging.

mobileSQUARED forecasts that (see FIG 19):

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

Messaging will dominate the revenue landscape

over the forecast period, followed by off-net calls

to mobile, while the contribution made to off-net

xed line calls is negligible.

The cumulative total revenues from off-net

OTT communications between 2012 and 2016

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.

With off-net messaging trafc forecast to be worth

US$2.93 billion in 2012, and US$6.4 billion in 2016,

and OTT-offnet voice revenue worth US$805.5 million

in 2012 and increasing to US$1.92 billion in 2016,

only the most dynamic and far-reaching operators will

be best-placed to capitalise on this opportunity.

Operators with the broadest reach in terms of

roaming agreements will be well-placed to potentially

Can operators make money from OTT?

Almost 16% of operators believe they will generate

incremental revenue from OTT services. However,

two-thirds of operators believe they will make money

from OTT services, but only at the expense of voice

and SMS revenues. The remaining 21% of operators

either believe operators cannot make money from

OTT services or remain undecided (see FIG 18).

48% of operators believe its

possible to generate revenue from

OTT services.

FIG 18 CAN OPERATORS MAKE MONEY

FROM OTT?

Less than 12% of European operators believe OTT

services will generate incremental revenues, with

almost 75% expecting revenues at the expense

of voice and messaging. The remaining 13% of

European operators do not anticipate OTT will

generate revenues. It was a similar split across Asia,

North America and Latin America, with the majority of


CAN OPERATORS MAKE MONEY FROM OTT?


31/35PAGE 31


Can operators make money from OTT?

terminate the OTT off-net trafc, provided of course

that they can accommodate the OTT-generated

trafc.

FIG 19 WHAT ARE THE OTT SERVICES THAT

WILL GENERATE REVENUES FOR OPERATORS?

Operators with the broadest reach in

terms of roaming agreements will be

well-placed to potentially terminate

the OTT off-net trafic, provided of

course that they can accommodate the

OTT-generated trafic.

One solution to provide interoperability is to deploy

RCS/RCS-e, which the majority of operators in the

research conrmed they were doing. But this is a

timely and expensive exercise, and in part explains

why a large percentage of operators are exploring

multiple OTT strategies.

One alternative option is to partner with a third-party

provider to mediate next-generation OTT originated

trafc (messaging, voice and video) with mobile

operators by converting it onto the SS7 network.

In this instance, OTT users are each issued with a

mobile number to ensure two-way communication

between their OTT provider and mobile operators.

Such a solution overcomes the walled gardens thathave 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

trafic (messaging, voice and video)with mobile operators by converting it

onto the SS7 network.

Mobile numbers provide mobile operators with a

compelling future-proof solution because they ensure

interoperability with the inevitable emergence of new

and even more innovative OTT service providers,

therefore maximizing mobile operators revenue-

generating potential from OTT off-net trafc.

CAN OPERATORS MAKE MONEY FROM OTT?


32/35 PAGE 32

Opportunities for operators

OTT services can only thrive in the mobile ecosystem

by way of mobile operators offering affordable data

packages to ensure an open internet experience for

their customers. This threat is being compounded

by the fact that in smartphones, the mobile industry

has nally found a form factor and user interface

that is not only compelling and intuitive, but has

transformed the relationship between the phoneand user. Consequently, in this Fragmentation of

Communication period, third-party providers are

delivering services directly to consumers that are

challenging the mobile operator hegemony.

Operators looking to rebuff this challenge by

attempting to block OTT services to protect revenues,

has to be perceived as a short-term strategy that will

ultimately limit the revenue-generation possibilities forthe operator.

Voice revenues have peaked and are now on a

downward spiral initiated by commoditisation and

more recently compounded by OTT services. Equally,

messaging revenues have long been projected

to decline by the analyst community, and have

for the time being at least, resisted all downward

overtures to date. But mobileSQUARED expects OTT

messaging apps to nally stie messaging revenues

growth from 2013.

That means operator cash cows of voice and

messaging are on the wane and every operator

should be looking for new revenue generators. And

falling within that category is OTT.

Mobile operators should view embracing OTT as a

way of delivering a new incremental revenue stream

that will partially substitute the decline in voice and

messaging revenues and will experience exponential

growth in the long term. After all, consumers are

embracing OTT services in their hundreds of

millions leaping to billions within a few years. It

is consumers opting for multiple communication

alternatives that have created this Fragmentation

of Communication. This could open the door ofopportunity for mobile operators who have the ability

to bridge the OTT and mobile network divide through

the provision of mobile numbers to each OTT user.

Embracing OTT should be

viewed by mobile operators as a way

of delivering a new incremental

revenue stream that will experience

exponential growth in the long term.

TABLE 1 - OPPORTUNITIES FOR MOBILE

OPERATORS

Options Short

term

Future

proof

Blocking OTT x

Retaining billing

relationship/data charges

Create an app

Partnering directly with

OTT players

RCS-e/Joyn x

3rd party access to OTT

via mobile phone

numbers / share of revenues

OPPORTUNITIES FOR OPERATORS


33/35PAGE 33


As Skype and WhatsApp have highlighted, users are

attracted to free services. Skypes business model

has developed using the attraction of free on-net

calls to then upsell users of cheaper off-net national

and international calls at present the conversion

is around 10% of the total Skype user base. Most

recently, the Microsoft-owned company has revealed

that advertising will be introduced to on-net calls.How its users react to the news remains to be seen.

While it monetises its on-net trafc, it could also be

used as a tactic to drive on-net users into becoming

premium paid-for customers. Clearly, a similar

advertising-based strategy might be deployed on

WhatsApp at some juncture in the future.

OTT services generally generate user traction by

delivering a free service. But these will eventuallyrequire monetising, which means their model will

adapt, and potentially undermine the users original

perception of the service. Mobile operators can use

this to their advantage.

In the short- to medium-term mobile

operators should be looking toprovide customers with access to

third-party OTT services.

Although mobile operators are in a reactionary mode

to the challenge posed by OTT providers, they are

well-placed to do so provided they are smart. For

instance, they must rst ensure that they retain

the central billing relationship with the customer.

Secondly, their global network must connect with as

many fellow operators as possible. And lastly, mobile

operators must adopt a multiple OTT strategy to

cover all bases.

By retaining the billing relationship, mobile operators

will monetise the access to OTT services via data

charges bundled within the monthly package.

By retaining the billing

relationship, mobile operators will

monetise the access to OTT services

via data charges bundled within

the monthly package.

But this can be expanded by adopting a multipleOTT strategy founded on developing a long-term

relationship with the customer.

In the short- to medium-term mobile operators should

be looking to provide customers with access to third-

party OTT services.

This can be achieved by launching their own version

of an OTT service, such as Telefonicas 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 operators

interested in capitalising on OTT, should have

complete interoperability secured with OTT service

providers.



34/35 PAGE 34

Any such short- to medium-term strategy will provide

sufcient time for mobile operators to deploy RCS/

RCS-e, and then develop their long-term strategy

to compete directly with OTT. In doing so, mobile

operators can offer a long term proposition that

provides the user with stability to a model they signed

up for.

Regardless, whether short-term or long-term, mobile

operators can only capitalise on the OTT opportunity

by positioning themselves as the bridge between

OTT off-net trafc and the mobile customer and by

removing all walled gardens.

The use of mobile numbers enable

operators to capitalise on the OTTopportunity by tearing down the OTT

walled gardens and providing

interoperability in the short term.

There are a number of routes available to mobile

operators to achieve this goal and ultimately monetise

OTT. RCS/RCS-e presents one option to address

the required levels of interoperability, while another,

which could be construed as both competitive and

complementary, is the use of the mobile number. The

advantage with the latter is that interoperability can

be achieved almost immediately allowing the mobile

operator to capitalise on the OTT opportunity and

limit the damage of the inevitable decline in voice and

messaging revenues almost overnight.




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ABOUT MOBILESQUARED

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industry to increase engagement with the mobile consumer. We conduct primary research on the

mobile industry and mobile consumers, with a focus on delivering exclusive forward-looking data

on mobile device usage, mobile web, app and commerce trends and usage, and mobile

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ABOUT TYNTEC

tyntec (www.tyntec.com) is a mobile interaction specialist, enabling businesses to integrate mobile

telecom services for a wide range of uses from enterprise mission-critical applications to

internet services. The company reduces the complexity involved in accessing the closed and

complex telecoms world by providing a high quality, easy-to-integrate and global offering usinguniversal services such as SMS, voice and numbers.

tyntec enables mobile operators with the capability to quickly and easily offer telephony in the

cloud for OTT services. Mobile operators can tap into OTT revenues by providing mobile numbers,

traditional voice and SMS into OTT services. In this way, operators can access revenue share and

termination fees from off net calling, helping them to replace revenues lost to the growth of OTT.

Founded in 2002, and with more than 150 staff in ve ofces around the globe, tyntec works with

500+ businesses including mobile service providers, enterprises, mobile operators and internet

Documents

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