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

A report by

Sponsored by August 2012

Information
METHODOLOGY
Research was conducted by mobileSQUARED during May and June 2012. The first 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 identified in the leading 68 mobile markets globally (see above). Total mobile users and smartphone forecasts 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 identified by mobile operators during the research process, and applied to the smartphone population in each market. Both Skype and Whatsapp were identified during the research process as the leading OTT voice and messaging service provider, and therefore provided the most visible use cases for the forecasting. Voice traffic (frequency) is based on Skypes off-net usage (including Skypes projected growth), and messaging traffic 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-fixed calls, ranging from $0.015, $0.025, $0.035, and a universal rate of $0.06 for off-net-to-mobile calls, and a flat-rate of $0.01 for SMS. The 68 countries researched are: China, India, us, Brazil, Indonesia, Russia, Japan, Pakistan, Germany, Nigeria, Mexico, Italy, Bangladesh, 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. Nb: Not all operators wanted to be listed.

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 Germany, Vodafone Germany, Orange Poland

Table of contents
Information 2-3

Smartphones, OTT & the fragmentation of communication

4-5

The operator view

6-8

OTT market forecasts

9 - 10

The operator response

11

OTT opportunities for operators and conclusions

12 - 14

Smartphones, OTT & the fragmentation of communication

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 of their 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. Aside from Skype and WhatsApp, there are now multiple communication channels open to users in particular smartphone users. By 2016, global smartphone penetration will stand at 39% and that means over one-third of the mobile population will be able to access OTT services via their smartphone. 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.

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 the capability 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 fixed-line) approaching 40 million minutes per day. Skype has now become to OTT what Facebook is to social media.

THE OTT WALLED GARDENS

Already, an iPhone user 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 flood 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.

SMARTPHONES, OTT & THE FRAGMENTATION OF COMMUNICATION | PAGE 4

The 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 stifles the impact OTT could have on mobile traffic and revenues.
As is customary with proprietary OTT services, interoperability can be considered their shortcoming. Indeed, our research identified three main areas of interoperability: 1. The lack of device/OS interoperability (BBM, iMessage)

Smartphones, OTT & the fragmentation of communication

Currently, this lack of interoperability in what we have an OTT weakness that operators can use to their advantage by offering a solution as their unique selling point. Yet they need to understand that their window of opportunity is small. This is a fast-moving market in which a lack of action could prove to be very costly. Whilst operators stand idly by new talent is emerging in the OTT sphere. Whatsapp and Viber have rapidly growing user numbers and thats before the likes of Facebook and its Messenger service gets a mention. The bottom line is, that the more time passes, the further entrenched non-operator OTT services become. The more wide-spread an OTT service is, the less important the lack of interoperability becomes. For why break out of the walled garden if everyone is already inside at the garden party? identified as a fragmented period of communication is

2. The lack of app interoperability (Whatsapp, Viber) 3. The lack of interoperability with featurephones and non-IP-based devices. Anyone with a smartphone can download Whatsapp, and therefore overcome the cross-platform limitations offered by BBM and iOS. However, the vertical limitations 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. Whether looking at OTT from a vertical or horizontal perspective, each service has constructed what is more commonly referred to as a walled garden.

PAGE 5 | SMARTPHONES, OTT & THE FRAGMENTATION OF COMMUNICATION

The operator view

Mobile operators are right to be concerned about OTT services. The research conducted by mobileSQUARED for this whitepaper reveals that 79% of operators believe that OTT clients on smartphones are a threat to traditional SMS- and voice-based services. The research shows that SMS continues to be the standout concern for operators. In 2011, 67.6% of operators identified messaging as the most challenged service by OTT, but that figure has increased to 73.7% in 2012 (see FIG 2). and SMS traffic and revenues. That figure has leapt to almost 32% in 2012, a year-on-year increase of 134% (see FIG 1).

FIG 1 - ARE OTT CLIENTS A THREAT TO TRADITIONAL OPERATOR SERVICES

In 2011, 67.6% of operators identified messaging as the most challenged service by OTT, but that figure has increased to 73.7% in 2012.
FIG 2 - WHICH ELEMENTS OF OPERATOR SERVICE TRAFFIC WILL BE MOST THREATENED BY OTT CLIENTS?

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

79% of operators believe that OTT clients on smartphones are a threat to traditional SMS- and voice-based services.
However, within the 79% of operators that identify the threat posed by OTT services, there is a growing number that is increasingly concerned with developments. Last year, 13.5% of operators strongly agreed with the statement that OTT clients on smartphones posed a significant threat to their voice

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

THE OPERATOR VIEW | PAGE 6

The operator view

According to the mobileSQUARED operator research (see FIG 3): Almost one-third of operators expect 1-10% of their customer base to be using OTT services by the end of 2012, with 57% believing 11-40% of OTT is now affecting traffic for almost three-quarters of operators. And this has certainly been reflected in the research, with 52.1% of operators claiming OTT has impacted on 1-20% of traffic in 2012, up from 29.7% in 2011 (see FIG 4)

their customer base will be using OTT services, 40% of the user base on OTT services. In 2016, every operator expects over 11% of

42% of operators believe that over 40% of their customer base will be using OTT services in 2016.

leaving 10.5% of operators anticipating more than

FIG 4 - HAS TRAFFIC DECLINED IN THE LAST 12 MONTHS AS A RESULT OF OTT?

their customer base to be using OTT services. In fact, 42% of operators believe that over 40% of their customer base will be using OTT services in 2016. This highlights the ease by which OTT players will be able to access mobile operator customers, and justifies mobile operators concern around the perceived threat of alternative services.

FIG 3 - PERCENTAGE OF OTT USERS IN 2012 AND 2016

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

52.1% of operators claim OTT has impacted on 1-20% of traffic in 2012, up from 29.7% in 2011.

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012 PAGE 7 | THE OPERATOR VIEW

The operator view

Every operator included in the research believes voice and SMS traffic will decline over the next 5-10 years (see FIG 5):

Around 46% of operators in 2011 believed traffic levels would drop by 1-20% in 5-10 years time,

43% of operators expect 11% and over of revenues to be hit in 2012.

Given that operators believe the impact of OTT on traffic has increased from 2011 to 2012, not surprisingly,

operators now believe OTT will have a greater impact on their traditional revenues. 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 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% of operators expecting 11% and over of revenues to be hit up by a staggering 169%.

and 27% are anticipating a traffic decline of 21% and over. But in 2012, 37% of operators believe the decline will be 1-20%, and 53% of operators expect a 21% and over decline of traffic as a result of OTT almost double the number of operators compared to the previous year. In 2011 only one-third of operators had experienced a decline in revenues as a direct result of OTT, but in 2012 that figure had doubled (see FIG 6). The greatest impact is on the 1-15% of revenues. In 2011, 10.4% of operators believed OTT had affected between 1-20% of their revenues. These figures have leapt in 2012 to 42% of operators now claiming OTT had impacted on 1-20% of revenues.

FIG 6 - HAVE REVENUES DECLINED IN THE LAST 12 MONTHS AS A RESULT TO OTT?

FIG 5 - WILL TRAFFIC DECLINE IN THE NEXT 5-10 YEARS DUE TO OTT?

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012 THE OPERATOR VIEW | PAGE 8

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 (see FIG 7). According to mobileSQUARED forecasts (see FIG 8): Messaging represents the largest off-net operator revenue generating community, with 118.9 million users already sending paid-for messages this year, 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. And then OTT-to-fixed 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 video communications bug sweeps the globe.

FIG 7 TOTAL MOBILE UNIVERSE

SOURCE: MOBILESQUARED, 2012

FIG 8 - OTT SMARTPHONE USERS BREAKDOWN BY SERVICE

As of 2012, 20% of global smartphone users are actively using OTT services, and this is predicted to reach 45% by 2016. Perhaps most notably for mobile operators, is that OTT users in 2012 will only account for 2% of the total global mobile subscription base, increasing to 18% in 2016. Though these projections could be conservative given that Apple plans to introduce an increasing number of OTT services, and other OS providers are expected to follow suit, which is likely to accelerate growth further.

OTT users in 2012 will only account for 2% of the total global mobile subscription base, increasing to 18% in 2016.
PAGE 9 | OTT MARKET FORECASTS

SOURCE: MOBILESQUARED, 2012

OTT market forecasts

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 period through a combination of OTT and competitive price erosion.

OTT communications will generate termination and interconnect fee-based revenues for mobile operators of US$3.7 billion in 2012 rising to US$8.4 billion in 2016.
mobileSQUARED forecasts that OTT communications will generate termination and interconnect fee-based revenues for mobile operators of US$3.7 billion in 2012 rising to US$8.4 billion in 2016. With off-net messaging traffic 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. Therefore, the incremental revenues generated from OTT interconnectivity will reduce the annualised decline in voice and messaging revenues (US$30 billion) by over 25%.

The OTT market is predicted to be worth US$166.5 billion in 2016, but its impact is already being felt by mobile operators today.
FIG 9 - WHAT ARE THE OTT SERVICES THAT WILL GENERATE REVENUES FOR OPERATORS?

SOURCE: MOBILESQUARED, 2012

OTT MARKET FORECASTS | PAGE 10

The operator response

Until now, operators have been responding to OTT in the following ways (see FIG 10 ): Direct partnerships with OTT players: Operators like 3 UK and Verizon have partnered with OTT players, such as Skype. Developing and launching their own services: T-Mobile USA Operators 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

has launched Bobsled and Telefonica has introtexts. Teaming up as part of the GSMAs Joyn

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

OTT, and could unquestionably result in churn as users seek alternative operators that are responding to OTT in a more constructive manner. To combat OTT, the mobile operator research highlights that a little over 47% of operators are rolling out IMS/LTE and will be able to offer unified communications by way of RCS and 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.

duced Tu Me, both of which offer free voice and

initiative: Operators such as Orange, Vodafone, Telefonica, Telenor and T-Mobile are attempting to create a new OTT standard by enabling Rich Communication Services (RCS-e).

FIG 10 WHAT ARE OPERATORS DOING TO COMBAT OTT CLIENTS?

In fact, 25% of operators had a dual OTT strategy, and the same dual strategy at that: to roll out IMS/LTE and to offer RCS/RCS-e while also partnering with OTT providers.

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

PAGE 11 | THE OPERATOR RESPONSE

OTT opportunities for operators

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. One certainty is that 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 finally found a form factor and user interface that is not only compelling and intuitive, but has transformed the relationship between the phone and user. Consequently, in this

FIG 11 - CAN OPERATORS MAKE MONEY FROM OTT?

Fragmentation of Communication period of 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 have to be perceived as deploying a short-sighted tactic that will ultimately limit their revenue-generating possibilities in the future. Voice revenues have peaked and are now on a downward spiral initiated by commoditisation and more recently compounded by OTT services, and a similar fate awaits messaging from 2013. That means the operator cash cows of voice and messaging are on the wane and every operator should be looking for new revenue generators. 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. Operators should focus on a multiple OTT strategy founded on developing a long-term relationship with the customer.

SOURCE: OPERATOR RESEARCH BY MOBILESQUARED, 2012

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.

OTT OPPORTUNITIES FOR OPERATORS | PAGE 12

OTT opportunities for operators

Operators have a wide range of options available to succeed in the OTT sphere: 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 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 benefit from their traffic. However, this will probably benefit 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 traffic and the mobile customer and remove all walled gardens by using the mobile number. This enables the operator to keep the traffic and gain a share of the revenues. Regardless of which of the tactics outlined above operators are adopting, one thing remains clear: To cope with the new reality that OTT presents operators, a change in mindset is required. The key operator revenue generators of voice and messaging will continue to decline and so operators will have to quickly decide which path they want to take to deal with 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.
CONCLUSIONS
OTT services generally generate user traction by delivering a free service. But these will eventually require 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. Although mobile operators are in a reactionary mode regarding the challenge posed by OTT providers, they are well placed to do capitalise on the trend provided they are smart. For instance, they must first 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.

PAGE 13 | OTT OPPORTUNITIES FOR OPERATORS

OTT opportunities for operators

Mobile operators should begin to 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. Blocking OTT services is simply not a viable long-term strategy and will doubtlessly drive churn. By retaining the billing relationship, mobile operators are able to partially monetise the access to OTT services via data charges bundled within the monthly package. But this clearly needs to be expanded by adopting a multiple OTT strategy founded on developing a long-term relationship with the customer. It is consumers opting for multiple communication alternatives that have created this Fragmentation of Communication. It is this Fragmentation of Communication that will ultimately open the door of opportunity for mobile operators so that they can bridge the OTT and mobile network divide through the provision of mobile numbers to each OTT user. 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. Any such short- to medium-term strategy will provide sufficient 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 traffic and the mobile customer and by removing all walled gardens.

Mobile numbers provide mobile operators with a compelling future-proof solution because their use in OTT apps ensures interoperability with the inevitable emergence of new and even more innovative OTT service providers.
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 maximising the mobile operators revenue-generating potential from OTT off-net traffic.

OTT OPPORTUNITIES FOR OPERATORS | PAGE 14

ABOUT MOBILESQUARED
mobileSQUARED provides specialist research which enables brands, agencies and the mobile 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 advertising responsiveness to help clients identify and respond to fast-changing mobile trends. And for a wider view of the industry, we provide detailed mobile industry user and revenue forecasts. Our clients look to mobileSQUAREDs expertise to provide candid insight into the mobile market. We do this using our extensive global network of senior contacts to research, collect and collate the latest data, developments, trends and insight on an ongoing basis. For more information www.mobilesquared.co.uk

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 using universal 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 five offices around the globe, tyntec works with 500+ businesses including mobile service providers, enterprises, mobile operators and internet companies. For more information: www.tyntec.com