The myth of “Telcos winning back revenue from OTT players”

Written by on February 27, 2015 in Guest Blog with 0 Comments

Lost revenuesIn the run-up to MWC, I’m seeing a spate of news articles in the telco press/blogosphere, or vendor press releases, which are titled something like:

How Telcos can Win Back Revenue From OTT Providers

These are almost all uniformly wrong or at least, misleading marketing hype or clickbait.

Let’s parse that sentence ‘win back revenue from OTT providers.’ I’ll tackle the continued use of ‘OTT’ later in the post – but it’s a legacy term that has no place in the telecom industry going forward.

But first, whatever you name them, so-called OTT providers generally do not take revenue from telcos. They take customers or usage, by offering either cheap/free or better services – often both. People use Whatsapp or SnapChat as a free, more-functional and cooler upgrade to SMS. They use Skype as an improved user-experience to telephony, and we’re seeing switching to myriad new voice/video apps and WebRTC-powered services, for contextual comms. Internet app providers often derive value in other ways (ecosystem, advertisers, stickers, recording, cloud services etc) by giving away message or voice transport for free. There is no – or very little – revenue to ‘win back.’

Telephony and SMS are not going to disappear entirely, but they are old and clunky lowest-common denominator services in a world of unlimited choice, and best-of-breed applications targeting individual use-cases and preferences. ‘Winning back revenue’ requires there to be revenue to win, and renewed consumer appeal competing against alternatives to a sufficient degree somehow to encourage payment.

Person-to-person SMS has historically been a rip-off. It’s never been ‘value-based pricing,’ it’s been grudge- or resentment-based pricing. We used to hear people say it allowed $10000/MB – and that’s the problem. It was orders of magnitude too expensive for a service that never evolved over a 20-year period. Sending 160 characters from A to B was cool in 1995. It’s not rocket science in 2015. Similarly, telephony transport is priced expensively compared to costs and value (for most uses) too. That said, VoLTE puts the implementation & production costs back up, in the unproven hope of future gains from spectrum re-farming.

The  telecom industry used to make over $100bn a year from SMS. It still makes a decent fraction of that, although the exact amount depends much on accounting and bundle-allocation chicanery. Excess SMS profits of close to a $trillion over the last decade or two seem probable – with minimal service innovation from reinvested cashflow. To put that in context, it’s probably larger than all banking bonuses worldwide over the same period.

That $100bn+ revenue is not coming back from simply sending mobile messages. It might partly come back from adding value to other ecosystems, or enabling particular purposes through A2P messaging integrated into business processes, but in terms of straightforward A-to-B transmission of text or pictures, it’s gone. An SMS is not much more valuable, inherently, than an email, and will converge with email in terms of pricing.

The big problem

In any case, increasing A2P revenues is not ‘winning back’ revenues lost from P2P. It’s completely distinct, and isn’t occurring at the expense of Internet-based alternatives.(Obviously, RCS just worsens the situation, by consuming extra costs & staff resources, for zero extra usage, zero extra revenue, a major opportunity-cost impact, and possible brand damage. It is worse than useless and needs the industry to capitulate entirely. I believe RCS needs to die with an obvious bang, not a whimper, for everyone to ‘accept & move on’).Similarly, the decline in mobile telephony revenues isn’t going to be slowed much by VoLTE, and certainly not reversed. It’s just telephony v1.1, and although HD voice and fast call-setup are nice, they don’t provide an obvious basis for billions in new revenue. VoLTE (and WiFi calling as well) are moderate feature upgrades – they don’t change the value proposition of telephony, or the use-cases to which it can be applied. They will not ‘win back’ revenue that has shifted from ‘vanilla phone calls’ to other modes of communication.Enterprise services are slightly more complex – but there the ‘OTT’ services are essentially just IP-PBX or UC platforms from major vendors, or else they are 3rd-party cloud services for conferencing, contact centres and so on. Those have been in place for years, and while telco-hosted UC or SIP-trunking have important roles, few in the industry would suggest they are seriously ‘winning back’ revenues from WebEx or Microsoft Lync. We can also forget about the silly ideas that some suggest, about arbitrarily charging/taxing the Whatsapps and Skypes of this world – as for example Dutch, Indian and Singaporean operators have tried to propose in the past, before getting intense public and regulatory push-back.
Firstly, most Internet app providers and developers don’t have the ability to pay 10’s or 100’s of billions of dollars. Secondly, unless compelled by telco-lobbied (bribed?) regulators, they have no reason to do so. They don’t need interconnect, nor QoS, nor sponsored data. They simply need half-decent Internet access, to offer applications that consumers deem to be valuable. Thirdly, there are no obvious mechanisms for this – especially for peer-to-peer communications, or new formats. In many cases, interconnect doesn’t make sense, as there is no feature-parity with humdrum ‘standard’ services like SMS and telephony. There is no pot of money in saying “we’re dumb, so please tax the clever people” – if telcos want to make money from selling Internet access, they need to balance it against the likelihood that users will shift some of their communications away from monopoly, legacy, unappealing services. If operators want to ‘regain revenue from Internet players’ there is only one way to do it: innovate at a service/application level, either internally or with specialist external help, and compete. Probably, that innovation willitselfrequire the open Internet, the web, mobile apps – or perhaps, proprietary communications platforms for certain uses.It will needa combination of both service development (for directmonetisation) and platform innovation (to attract developers). Both require a culture of risk-taking, software development, innovation management, partnership, and a willingness to ‘act first, standardise later, if ever.’ It’s possible that VoLTE, or network-based telecom app & API platforms, orA2P SMS might form a role, but they still need multiple layers of genuine novel service elements that add value and differentiation. Telcos need to solve specific user or business problems. There are no new generic, standardised services that will pass muster on a standalone basis. (No,ViLTE video-calling won’tmake a difference).And yes, some vendor solutions might help here. Telecom application-development platforms, new billing and OSS systems, gateways and WebRTC systems of various types, SDPs and their evolutionary descendants, virtualised NFV components that are flexible and scalable and so on.

And potentially, all of these allow operators to create new services – as discussed in a previous post on NFV and SDN. But those will be incremental revenues – not somehow displaced from Facebook or Google, unless they specifically address the online advertising sector. The telecom & Internet business is not a zero-sum game. Revenues for plain-vanilla standalone phone calls and SMS are declining. Other things will rise, but the idea that telcos will “win back” revenues that have evaporated from services nearing obsolescence is a flawed and false narrative.

Not only that, but most operators are hoping to offer API-based capabilities to Internet firms, and act as developer platforms. And a golden rule of such business models is that the platform owner has to help the developers make more money even if they then take a cut. If telcos want to make money from Facebook, WeChat, Skype, they will need to help them earn yet higher revenues. They will have to employ developer-relations or partner management staff whose job will be increasing Viber’s and YouTube’s and Netflix’ and SnapChat’s scale and value.

So a more reasonable slogan might be “Telcos can win a share of OTT’s future accelerated growth”. They won’t ‘win back’ revenue unless they compete head-on and win.

Back to the terminology: as a general guideline, anyone who uses the term ‘OTT’ is in the wrong job, especially if talking about voice/video/messaging. It betrays an antiquated sense of ‘entitlement’ and ‘network privilege’ – and a lack of understanding of the Internet and software development. (People in the IPTV/online video sector tend to use OTT in a different way that is less belligerent and confrontational).  All telcos have so-called “OTT” activities – none could even exist without their website on the Internet, for sales, customer service and even investor relations. To say otherwise is hypocrisy and ignorance.

Internet app providers are just peers and equals to telcos, at an application level. To ‘win back’ revenues, telcos need to compete with them, not just mildly refresh ancient services or transfer them to virtualised infrastructure.

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Dean Bubley

About the Author

About the Author: Dean is founder and director of Disruptive Analysis and a prominent, influential & outspoken technology industry analyst and consultant, specialising in the telecoms, mobile and wireless sector. He speaks at 30+ conferences per year and offers strategic advisory services to operators & vendors? He can be contacted at .


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