Carrier Opportunities in an Over-the-Top (OTT) World

In light of Verizon’s quarterly earning report, I wanted to finally publish a version of the White Paper I penned in early June 2016.

Here at Flyp, we spend a fair amount of time debating what the communications industry is going to look like in ten years. What players will dominate the space? What technologies will they use to deliver their products and services? Which mediums will command our time and spending habits? Will the transformations be evolutionary or revolutionary?

As any good history professor can tell you, if you are looking to prognosticate — start by looking into the past. Enter Lowell McAdam, Verizon’s CEO, and his open letter to Bernie Sanders on Verizon’s [then] ongoing employee strike. Buried within his rebuke of ‘The Bern,’ McAdam nicely crystallizes Verizon’s strategic rationale over the past decade.

Competition and technology change have eaten into our traditional phone business, with more and more Americans giving up their landline phones altogether. As a result, wireline now accounts for less than 30 percent of Verizon’s total operating revenues, down from 60 percent in 2000, and less than 7 percent of our operating income. To remain competitive, we’ve transformed our wireline operations into a broadband company by building fiber-optic networks, offering Internet and video services, and investing in employees’ skills and work tools to help them make the turn to a 21st-century digital economy.

While much of the above only holds specific relevance for developed countries with traditional landline infrastructure and incumbent players, McAdams does well to highlight the relentless nature of technological evolution and its impact on telecommunications. Nature’s basic maxim — ‘adapt or die’ — still holds true, even for Verizon, one of America’s largest and most successful companies.

The telco industry is in the midst of a strategic renaissance: connectivity is a given, content and services now reign supreme. AT&T’s recent string of video-centric, content-led acquisitions provide a timely example; the telco giant scooped up OTT video streaming platform QuickPlay Media in May, a natural fit for DirectTV — the satellite streaming service they picked off for a cool $50 billion last summer. This is in addition to Verizon’s [rumored] bid for faltering web giant Yahoo! and Tencent’s move to buy SoftBank’s majority stake in Supercell Oy, the Finnish developer of some of the world’s most popular mobile games. It’s clear the major players are all jockeying for monetizable digital content.

The entire industry is under assault! The carriers, who have lost the bulk of their messaging service subscribers, are now at risk of losing them for voice. Voice services are increasingly being commoditized, becoming the oft overused ‘dumb pipes.’ Carriers across the world are reeling from the effects of OTT’s onslaught. Irrespective of carrier lifecycle or infrastructure development, from South America to Africa and the Middle East, carriers are fighting to stem the rising tide of OTT services and their ability to circumvent traditional networks. The telecommunications industry is at a crossroads and, as The Wall Street Journal notes, they are “scrambling to compete” and answer the challenge from the OTT messaging apps.

Wireless retail prices continue their race to zero, but carriers’ massive infrastructures are still tremendously capital intensive. According to industry expert Jan Dawson,

“The four major U.S. wireless carriers will spend more than $30 billion this year on capital expenditure, with the vast majority of it going to maintain their existing networks while improving coverage and increasing capacity.”

Mobile network operators continue to spend billions of dollars each year, but to the benefit of OTT players — enhancing the network and expanding their ability to push more content over the network.

The advent of OTT services as a legitimate threat to traditional wireless carriers has created a watershed moment in the industry.

Skype, WhatsApp, and other third-party Internet voice applications are no longer tangential competitors. They are multibillion-dollar juggernauts gearing up to dominate global communications. This is a global phenomenon, and carriers like China Mobile, Deutsche Telekom, and Telefónica are all struggling to counter the growing trend of falling prices for basic voice and data services.

The messaging wars are long over — or as telco luminary Dr. Kim (Kyllesbech Larsen) epitomizes,

“WhatsApp already has taken the SMS Scalp with 30 Billion WhatsApp messages sent per day. For comparison the amount of SMS sent out over mobile networks globally was a bit more than 20 Billion per day.”

Free messaging is great, but it’s not all the OTT players offer — they are consistently reliable and feature-rich. As Matt Heiman states,

“the assurance of knowing that one’s message has been delivered and the synchronous knowledge that the other user is typing add a deeper level of intimacy and immediacy to the conversation. The ability to easily share media, the lack of a character limit, the seamless continuation of a conversation while switching between desktop and mobile, and the lack of per-message international charges all add to OTT messaging’s appeal.”

Now, the OTT players have moved on to attack one of the carrier’s remaining core business — voice. Voice is still an incredibly large, important and yes, growing portion of the carriers’ business model. Despite what the messaging pundits may tell you, “classic mobile voice is not dead! global mobile voice usage grew more than 50% over the last 5 years.” The problem for the carriers is that despite the global growth in voice traffic, “global voice revenue remained largely constant” over this same period. Falling prices and accelerating competition from OTT players is materializing on the top and bottom line.

By 2018, the telecommunications industry will have lost $386 billion in revenue since 2012 as a direct result of its customers using OTT voice applications. According to Ovum, consumer use of OTT VoIP in that same time period will grow at a compounded annual rate of 20 percent, to reach 1.7 trillion minutes. That translates to $63 billion in lost revenue in the final year of its forecast.

TeleGeography “estimates that the on-net international Skype traffic grew 35 billion minutes in 2014, to 248 billion minutes. Skype’s 2013 international traffic was four times greater than that of the largest telco in the world, and Skype’s 2014 traffic growth was nearly 30 percent greater than the volume growth of every carrier in the world, combined.”

What should trouble the carriers is how quickly and effectively these OTT apps penetrated the messaging market and how they are now on the leading edge of driving transformation in voice. We all know the gaudy statistics: WhatsApp and WeChat have amassed 1 billion and 700 million monthly active users, respectively. Almost every major messaging platform has rolled out a voice or video calling feature — citing its relevance and value to the consumer. In 2015 alone, WeChat users spent 280 million minutes DAILY on voice and video calls. In March 2016, LINE announced its plan to create an MVNO, LINE Mobile, in partnership with DoCoMo cellular that will offer unlimited free LINE for JPY 500 (USD $4.40) a month.

It’s abundantly clear that the OTT players are cannibalizing the carriers market; however, they are not siphoning any of the revenue. This is not a zero sum game — the billions of dollars the carriers have lost in voice and messaging traffic has simply evaporated. For the carriers, here lies the opportunity!

Despite nearly a trillion dollars in market cap, the top five OTT providers have not been able to monetize their core communications services. Viber has vowed to always offer free VoIP calling, WhatsApp removed its annual subscription fee and neither LINE nor WeChat charge for messaging or voice. Despite the popularized upheaval the traditional SMS market has witnessed, it’s still the only mobile messaging product that makes any money.

Mobile network operators, not the OTT players, dominate the communications industry from a revenue and subscriber perspective.

The carriers have a window to leverage this strategic advantage and position themselves for the next evolution of communications.

However, they need to act quickly as their revenue moat is disappearing. The OTT players are no longer standalone, fledgling start-ups, they all have strong, aggressive parent companies with endless resources and far better consumer products. Facebook and Microsoft alone comprise over 75% of the combined market cap for the top five OTT companies, and both have made messaging and communications the centerpiece of their new mobile strategy — powerful chat apps with artificial intelligence, bots, and virtual assistants. The OTT players are thinking long term and positioning themselves to more effectively collect the flow of dollars — transactions, services and mobile content & advertising.

Let us also not forget Google’s ‘Fiber’ project — what some are calling “the most audacious part of the whole Alphabet.” Google aims to build its own vertically integrated network and control the entire stack — from physical spectrum to end-point connectivity and consumer facing devices and software.

So what can the carriers do?

Market forces have created a unique opportunity for solutions with the capability to bridge the carrier-OTT divide and create partnership opportunities that will lead to the emergence of the new, modern telco.

The carriers can begin undercutting the OTT apps, Googles and Facebooks of the world by leveraging their networks for what they are — the most effective distribution and delivery channels on the planet. The carrier’s need to drastically rethink their antiquated approach towards monetizing their user-base and begin to supplement their traditional revenue streams by monetizing proprietary applications and services. They also need to move past the fear of cannibalizing their own revenue base; carriers need to learn that if they don’t move to retain their customers on carrier-led products, the OTT players will just steal them away.

The operators are not just in a fight with the OTT apps (WhatsApp, LINE, etc.); they are also quickly moving into direct competition with advertisers (Facebook, Google) and the other “freeloaders” who ride over their network infrastructure. Billions of dollars run across carriers’ networks each day, but they lack the mechanism to monetize the traffic. According to Morgan Stanley, in the first quarter of 2016, 85 cents of every new dollar spent in online advertising will go to Google or Facebook (67 cents in the mobile Ad Market.) The addressable mobile ad and search markets are endless — according to recently released statistics “Google’s ads have driven over two billion total app downloads…and it got there thanks to the universal app campaigns ad tool, which lets developers promote their app across search, YouTube and Google’s mobile ad channels. The tool doubled the app installs volume over the past year.”

[Verizon’s acquisition of Yahoo’s advertising technology is an natural fit with AOL’s digital properties…but will they be able to garner enough scale to effectively penetrate and materialize on Verizon’s top line?]

The carriers can protect their current and future revenue streams (voice, etc.) by leveraging their inherent infrastructure and distribution advantages to expand their existing offerings. By building differentiated services, they can monetize in new, innovative ways. Carriers need to approach their networks differently and begin an aggressive partnership strategy. They own the core connectivity — why not partner with other software and service providers to make the most powerful and consumer friendly platform possible?

As we have seen, the carriers cannot do this alone. Message+ and other standalone carrier applications have all failed to achieve the necessary market adoption. Whether it was a lack of modern consumer features, cross-carrier interoperability issues or simply not offering the application to non-carrier subscribers — the carriers have not been able to deliver a product with all of the necessary capabilities.

Carriers would be wise and forward-thinking to partner with third-party developers and begin delivering services they can monetize via alternative channels like mobile advertising, contextual search and consumer content (stickers, games, videos, AR, etc.) that provide myriad avenues to connect brands, publishers, and advertisers with their users.

How can they do it?

Mobile messaging and communications apps have emerged as the platform of the future — they dominate our time spent on mobile, they are the preferred medium of communications and they are the perfect mechanism to monetize an active user-base.

“In 2010 reaching mobile users was all about apps. In 2016 messaging platforms emerge as the next frontier in tech after apps, social and the web itself. Messaging apps trained hundreds of millions of people to use a text-based user interface to message their friends and family. Now this user interface paradigm is being extended into communication with brands, companies and services. At the same time, messaging apps are transforming into messaging platforms.” (Vision Mobile)

However, the current OTT players are limited in their ability to deliver a carrier-grade solution capable of addressing carrier’s technological and business requirements. WhatsApp, Line, Facebook Messenger, et al. are all closed, fractured ecosystems that can’t seamlessly operate across all technologies, carriers or operating systems.

Carriers need a fully-featured messaging and voice solution that is OTT functioning but is also PSTN capable — meaning carriers can leverage it to function both in and out of network. As Telegraphy notes,

“No other communications or social networking service can match the global reach or ubiquity of the PSTN. While Facebook has approximately 1.35 billion monthly users, at year- end 2013, the PSTN connects just over 8.4 billion fixed and mobile subscribers [monthly].

Take the market’s response to Google’s new Allo messaging app and its inability to bridge disparate systems. As one reporter states, “Given the size of the opportunity around a global-scale communication app, Allo was ripe for a similarly attention-getting feature set. Had it integrated with the native SMS app on Android, or allowed you to send messages from the desktop, it could have debuted as a powerful competitor to Apple’s iMessage. Instead we’re getting a relatively standard messaging app augmented by bots, which have taken on a distinct flavor-of-the-month feel since Facebook introduced them to a chorus of shrugs at F8.” Yet another example of Google’s disjointed communications strategy.

Where so many other apps have floundered is this lack of ubiquity across all networks and technologies. The pure OTT and carrier apps are independent communities that either cannot access the global PSTN or cannot offer a first-rate consumer experience.

What the carriers need is an app that has it all — highly scalable and capable of global deployment across any environment (even 2G or 3G) and functions intelligently over the cellular channel & WiFi — while remaining fully featured!

Something witty and insightful to end…