The OTT butterfly effect Small

companies and apps with big influence

Tim Drflinger
17.02.2015

We make ICT strategies work

1

2/19/2015 Detecon

Our lives are constantly reshaped by

innovation, in the Telco sector the trend
setters are now the OTT players

Introduction: The OTT butterfly effect

The flap of the OTT butterflys wings today can set of a hurricane in the telco industry
tomorrow threatening the very existence of traditional telco operators in the near future.
The OTT Butterfly and its effect on the Telco Universe
In chaos theory, the butterfly effect is the
sensitive dependence on initial
conditions

A small change in one state of a

deterministic nonlinear system can result
in large differences in a later state.

The name of the effect, coined by

Edward Lorenz, is derived from the
metaphorical example of the details of a
hurricane (exact time of formation, exact
path taken) being influenced by minor
perturbations (e.g. the flapping of the
wings of a distant butterfly several weeks
earlier.

The butterfly effect metaphor can be

adapted to the Telco universe , where
small and flexible OTT players create
changes in market conditions today, that
can have a hurricane effect on Telco
operators in the near future.
Detecon

Trends and challenges: The current regulatory imbalance

2014

xxxxxx

xxxxxxxxxx

First Release 2009

Subscriber numbers:
~ 600 Mil. global users
Revenues:
Not disclosed
Employees:
55 full-time (2013)

2014
Subscriber numbers:
~ 280 Mil. global users
Revenues:
Not disclosed
Employees:
Not disclosed

First Release 12/2010

Subscriber numbers:
+50 Mil. Global users
Revenues:
US$4.37 billion (2013)
Employees:
2,000 full-time (2013)

Founded 1997
4

Detecon

2014

2/19/2015 Detecon

The road ahead

Introduction: The drivers for fixed and mobile data growth

Innovation in the field of ICT products and services is significantly changing human
communication behavior and drives data usage on both fixed and mobile networks.
The drivers for fixed and mobile data growth

Selected quantified data drivers

Mobile Subscribers (in Million)
+4%
6.657
207
1.919

TV Device Sales (in Million)

+6%

8.506
2.341 +1.029%

256
97

4.383

365

341

+721%

25

-86%

+128%

4.531

159

1.782
2013

-69%

2019

4G / LTE

3G

2013
<3G

M2M Connections (in Million)

2019

Smart TVs

Regular TVs

Active Videocall* Accounts (in Million)

+44%

+16%

494

1.636

199
185

Source:
Source:
Source:
Source:

IC Intelligence Centre (2013) - TV Devices Forecasts

Ovum (2014) - Mobile Subscription and Revenue Forecast
Ovum (2013) - Global Cellular M2M Connections
Strategy Analytics (2013) - VoLTE, OTT Voice & Video Call Forecasts

+%
6

2019

2013

Compound Annual Growth Rate (CAGR)

* e.g. Skype and Facetime

2019
Detecon

2013

Introduction: The operator profitability trap

OTT players evolve into the service providers of the future at the expense of Telco
operators and push them into a severe data transport, revenue and profitability trap.
Revenue development in relation to traffic growth
Traffic: in Petabyte
Revenue: Million US $

Minutes: Billion units

Revenue: Million US $
1.654.872

25.000

432.019

376.360

400.000

25,000
20,000

300.000

15.000

266.669

450.000
350.000

813.409
450.509

Unit: Million US $
30,000

403.231

20.000

328.551
157.850

The Telco operator profitability trap

10.000
15.574

17.744

20.217

5.000

250.000
200.000

15,000

150.000

10,000

100.000

5,000

50.000
0
2013

2016

Mobile Network Traffic

Fixed Network Traffic

2019
MNO Data revenues

0
2013

2016

0
2010

2019

Shrinking
margins
2012

2014

EBIT
negative
2016

2018

2020

EBITDA
negative
2022

2024

2026

Mobile Voice Minutes (global)

Revenues

Mobile Voice Revenues (global)

OPEX

CAPEX + Depreciation

The Internet is evolving into an imbalanced media distribution platform (increasing downloads and stagnating uploads)

Data traffic is growing exponentially and significant network investments are needed to meet the future demand

The needed investments can not (yet) be recovered by data revenues and traditional voice revenues continue to shrink

In addition, OTT players re-shuffle the market balance by focusing on the content offering, rather than on the traffic

Operator profit margins significantly decrease over time and require innovative solutions to address these challenges

Source: Analysis Mason (2014) - Fixed network data traffic worldwide

Source: Strategy Analytics (2014) - Wireless Operator Performance Benchmarking Q1 2014

Detecon

The key challenges for Telco operators

Trends and challenges: The rise of OTT players

The number of OTT players that offer fully location-independent innovative services is
constantly growing, attracting millions of subscribers with on a global scale.

Source: Detecon Research 2014

Detecon

OTT Landscape - Overview of the most dominant OTT players

Trends and challenges: The rationale for OTT growth

OTT players are expected to surpass established Telcos in the long run by claiming the
majority of revenues from services that are built on top of the operators infrastructure.

Unit: Billion US $

The rationale for OTT growth

The forecasted absolute growth rates

highlight the changing relationship
between traditional vs. future services

OTT service revenues explode as:

+1.720%
+53%

476

458

497

519

540

560

580

600

624

649

753
675 702
526

Services with a large customer

base move from free to fremium
or subscription based models

OTTs expand and focus their

services on mobile platforms, as
the mobile penetration rates rise
and usage behavior evolves

The data analytics and business

intelligence tools evolve,
increasing advertisement funding

368
257

41
2010

58
2011

74

2012

94

2013

Telco Services Market

117

2014

137

2015

180

158

2016
(e)

2017
(e)

2018
(e)

2019
(e)

OTT Services Market

Source: IDATE - World Internet Services Markets 12/2013 and Detecon Forecast (e)

2020
(e)

This revenue explosion is built on the

back of network operators, leaving
them with network expansion costs to
accommodate the data growth

Operators will face severe profitability

challenges in the future

2021
(e)

Detecon

Development of global Telco and OTT services market (2010 2021)

Trends and challenges: The impact of revenue squeezers

Voice, Messaging and Video OTTs can be seen as profit squeezers, their services do not
only impact traditional Telco revenues but pressure the network infrastructure.
Profit Squeezers
OTTs offering
competing services
with free(mium)
business models or
high capacity
demanding services

Mobile messaging
~ 49,0,6 bn US $
in SMS revenues
lost to OTT players
in 2014 (globally)

Video / TV Services
Video is expected
to contribute the
single largest
portion of mobile
data traffic, at over
70% by 2016

Greatly harming
operator traditional
revenue streams or
resulting in heavy
infrastructure
investment to support
QoS on OTT service

Source: Ovum 11/13 Consumer VoIP Forecast

Source: Ovum 09/13 Mobile Messaging Traffic and Revenues Forecast

10

Detecon

Voice and Messaging Services

Trends and challenges: The potential of revenue generators

Several OTTs can be identified as revenue creators, as their digital business evolve and
services get pushed into the market generating revenue streams unknown to operators.
Social and e-Commerce Services

Revenue Creators

Cloud, Games and Music Services

OTTs offering
innovative services
with compelling
business models
based on Business
Intelligence data

Source: Detecon Research 2014

11

Detecon

Most of business
models are driven by
advertisement
revenues built on the
basis of customer
profile knowledge

Trends and challenges: The current regulatory imbalance

As a new regulatory balance is not yet in sight, operators need to act quickly on their
own to cater for these challenges and develop adequate OTT response strategies.
Growing Imbalance between Telecom and OTT universe

Telecom Universe

OTT| Communication Universe

Heavily regulated industry

(e.g. SLAs are included in the service
license)

Limited/ no regulation (No service

license required, interconnection not
mandated)

Telco based standards (ITU)

Internet based standards (IETF)

Limited/ slowing growth

Rapid growth

High pre-investment required

Low, scalable investment

Significant employer

Limited direct employment

Moving towards IP

IP based

Traditional business models

Subject to national tax regime

Disruptive models (free, freemium,

ad based etc)

Usually subject to universal service

obligation

12

Detecon

Regulatory Challenge: Deregulation vs. Regulation of OTT?

2/19/2015 Detecon

Operators find themselves at a cross roads

and need to take a strategic decision

13

Trends and challenges: Operators at the crossroads

Operators need to carefully decide how to deal with OTT players as their different types
of business models may determine the sustainable future of operators business.
Operators face a crossroad regarding OTT impact on their business
OTT Business Model
Refinement & Maturity

OTT Business Models

OTTs business models develop at a

fast pace and change the traditional
revenue split

High Bandwidth Video

Advertisement is the main

revenue source of many OTTs.

Paid subscriptions start to work

for larger customer base OTTs

Fremium apps have thrived as a

innovative monetization strategy

Cloud storage as an add-on

service has ramped profitability

Business Intelligence is the

most powerful tool of content
distributors

Best-effort free services

cannibalize traditional revenues

Strategic
decision
needed

Service deployment over time

OTT Perspective

Operator Perspective

14

Flexibility and innovation are the

only way operators can monetize on
future opportunities
Detecon

Profitability level over time

Voice and Messaging

2/19/2015 Detecon

What can operators do about it?

15

Solution: Operator response strategies

In principle, Telco operators can choose between three strategic directives to mitigate
the impact of OTT players on their core business: Defend, Attack and Co-Operate.
Overview of the most common response strategies for Telco operators

Do Nothing
(Zero Option)

Defense
Strategy

Neutralize OTT
Effects

Attack
Strategy

Block OTT
Services

Emulate OTT
Services

16

Co-operate
Strategy

Product / Service
Partnerships

Acquire OTT
Players

Sponsored Data
Approach
Detecon

2/19/2015 Detecon

OTT Impact Case Studies

17

Selected Case Studies: Overview

The following case studies were chosen to assess the impact of OTTs on African Telco
operators and derive region specific strategies for operators based on current trends.
Cooperate Strategy Airtel Nigeria

Cooperate Strategy Vodafone Qatar

Nigeria

South Africa

Qatar

OTT Video, Gaming, Music

OTT Messaging

OTT Mobile Video

MTN creates the content platform

MTN Play to reduce usage of
OTT content and increase brand
perception

Partnership between OTT

messaging player WhatsApp and
Airtel Nigeria

Subscribers get mobile access to

content such as games, news
wallpapers, ringtones, music, and
videos

Exclusive WhatsApp-branded
mobile data plan from Airtel to
compensate SMS revenue loss
and increase brand perception

Vodafone Qatar has partnered

with Go by OSN to give
customers access to a large
selection of movies and series

MTN Play is now available to

MTN subscribers in 22 Markets in
Africa and the Middle East

The service is currently available

on PCs and Macs, Smartphones
and tablets and subscribers can
take advantage of dual-device
screening

Vodafone is expecting to drive the

update of its recently launched
LTE service through this value
proposition

The partnership has been

extended regionally to other Airtel
Markets (e.g. India) and to
include other OTT platforms such
as Twitter and Facebook

18

Detecon

Attack Strategy MTN play

Case Study I MTN Play

MTN Play is a digital platform developed and operated by MTN which offers subscribers
a variety of OTT content which they can access on multiple devices.

MTN Play was launched in 2009 in South Africa and

expanded to other MTN markets

MTN Play is currently offered in 21 out of the 22

countries in which MTN it has mobile operations

MTN subscribers can access content which includes

music, sports, news and information , applications,
games, entertainment, social networking, as well as
various streaming services (e.g. Mobile DVB-T)

The content offered on MTN play is platformindependent and tailored to each MTN market with
options such as local soccer team updates and local
music available

Using MTN Play

User
downloads
application /
access via
the internet

Source: Detecon Research 2014

19

User
subscribes
to content /
purchases
once off

Billing via
deduction of
airtime balance,
voucher, mobile
money etc.

A range of mobile handsets and operating systems,

(basic feature phones to smartphones and tablets) is
catered for by MTN Play

The option of either subscribing to content or

purchasing once off is possible

There is flexibility of cost to the subscriber as there

are a variety of services to choose from

Both prepaid and postpaid customers can use the

service

MTN Mobile Money, e-vouchers, loyalty points or

airtime can be used to purchase content
Detecon

Background

Case Study II Airtel Nigeria and WhatsApp

With the expected uptake of OTT voice and messaging users in Nigeria, SMS traffic on
Airtels mobile network as well as SMS ARPUs are expected to decrease.
Nigerian OTT Voice
xxxxxxxxxxxxxxxxx
and Messaging users (millions)

Selected quantified data drivers

ARPU
in US $

Messaging
Voice Services

Voice
25
20

+43%
15
10

5,91

5,84

5,72

5,61

5,50

5,39

1402

1606

1670

1638

1704

1738

0
2011

2012

2013

2014

2015

2016

2017

ARPU
in US $

2012

2013

2014

2015

2016

2017
Data Services

2011

Development of SMS Traffic on Airtel Nigeria Network

SMS Traffic
in Million

1435

1450

1419

1348

1281

1217

1156
SMS Services

500
0
2011

2012

2013

2014

2015

2016

1,83

2
1
n/a

0,32
83

2011

2012

0.3

0,64
165

0,91
198

238

286

2014

2015

2016

343

200
100
0

2013

2017

-2%

Revenue
in Mio. US $

0,27

0,27

0,26

0,26

0,25

0,25

68

74

76

77

79

81

2012

2013

2014

2015

2016

2017

100

0.2
0.1

50

n/a

0
2011

Source: Strategy Analytics 2014, * Detecon Forecast for years 2014 2017

20

400
300

1,29

0.0

2017

Source: Analysys Mason OTT worldwide forecasts 2013, * Detecon Forecast for years
2014 2017

2,60

+52%

ARPU
in US $

1000

Revenue
in Mio. US $

-4%

1000
500

n/a

2000
1500

1500

Revenue
in Mio. US $

-2%

Detecon

OTT Users
in Million

Case Study II Airtel Nigeria and WhatsApp

By partnering with WhatsApp, Airtel intends to reduce the negative revenue impact of
OTT messaging by monetizing WhatsApp usage through specific tariff plans.

Airtel Nigerias partnership with WhatsApp Inc. offers

all Airtel prepaid subscribers a WhatsApp branded data
plan that provides unlimited access to WhatsApp
usage for a monthly subscription fee

This partnership is a first in Nigeria and is currently

exclusive to Airtel

Subscribers who activate Airtel data bundles of 200MB

or more (up to 15 GB per month) also get unlimited
access to WhatsApp messaging without having to pay
for WhatsApp usage via deduction of airtime

Airtel Nigeria WhatsApp and WTF bundle tariffs

All core WhatsApp features are included in the bundle:

Instant messaging and Multi-user messaging

File sharing

Location sharing

Message broadcasting

Audio messaging

Airtel also provides a WTF (Whatsapp, Twitter and

Facebook) bundle that offers unlimited access to all
three OTT platforms

Source: Detecon Research 2014

21

Monthly subscription fee for Airtel WhatsApp bundle is:

100 Nigerian Naira (0.62 US $)

Monthly subscription plan for 200MB, which includes

unlimited WhatsApp usage, (i.e. Usage is not taken off
data volume) is: 1,000 Nigerian Naira (6.14 US $)

Monthly subscription fee for Airtel WTF bundle is: 200

Nigerian Naira (1.23 US $)

For WhatsApp activity after expiration of bundle

subscription, Airtel customers will be billed based at
Pay as you use rates of 5kobo (0.003 US $) per
Kilobyte

Detecon

Airtel Nigeria and WhatsApp partnership

2/19/2015 Detecon

Key Take-Aways

22

Key Take-Aways

The current developments in the OTT market increase the pressure on operators. There
is only a short window of opportunity to develop the right response strategy.

Global Data Usage

Growth

Innovation in the field of ICT products and services is significantly changing

human communication behavior and drives data usage on both fixed and
mobile networks, a challenge all Telco operators have to deal with.

The Operator
Profitability Trap

Global data traffic has exceeded voice traffic by far but the generated revenues
can not (yet) cover the required network investments as OTT players claim an
increasing amount of traditional Telco revenues for themselves.

The Rise of OTT

Players

The globally growing number of OTT players with innovative business models
is putting increasing pressure on Telco operators. The market for OTT services
is expected to surpass the traditional Telco services market by the year 2021.

A Regulatory
Imbalance Remains

As a new regulatory balance is not yet in sight, operators need to act quickly
on their own to cater for these challenges and develop adequate OTT
response strategies.

Definition of a
Response Strategy

There is only a short window of opportunity for operators to elaborate a specific

response strategy before their performance is significantly impacted by OTTs.
Operators can choose between a Defend, Attack or a Cooperate Strategy.

Learning from
best practices

By carefully analyzing the strategies chosen by other operators around the

globe, operators can draw upon best practices and benchmarks to support
their decision making.

23

Detecon

Thank you for your attention!

Questions, comments and discussion?

We make ICT strategies work