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Revenue Rift: OTT players cut into operator earnings

March 27, 2014
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Telecom markets worldwide are increasingly being flooded with applications and platforms such as WhatsApp, Viber, Skype, Facebook, Line and WeChat, which offer messaging and calling services for free or for a small subscription fee. Although such applications allow subscribers to connect with their peers worldwide for almost no charge, the increasing adoption of these over-the-top (OTT) services has had serious repercussions on operator revenues.

For years, operators worldwide enjoyed significant cost benefits by offering SMS services, which are generally routed through the same network used for transmitting voice calls. Operators bear no additional network cost for routing SMSs but charge substantially for the same, which makes a successful business case for them. However, the launch of OTT applications has rendered the traditional mode of messaging (SMS) redundant. By providing the option of sending free/discounted international messages and making cheaper international calls, OTT applications have captured a significant share of operators’ SMS users and revenues. According to industry analysts, SMS usage among subscribers drops by 40-50 per cent once they start using mobile internet services, which provides them access to applications such as WhatsApp and Viber.

The rising uptake of OTT services has put the role of operators in the telecom value chain under threat. There are concerns that operators will be reduced to mere dumb pipes in the future, providing ready-made networks for services from application developers and OTT players.

Operators have made significant investments in building, maintaining and upgrading their telecom networks; and are still dedicating substantial capex towards network roll-outs every year to cater to rising bandwidth demand. In contrast, OTT players have not contributed much towards building infrastructure as their services ride on operators’ networks. A case in point is the Facebook-WhatsApp deal, wherein Facebook has conveniently added about 450 million subscribers without having to build a new fibre network or investing in other infrastructure.

In such a scenario, operators’ concerns over losing their position in the telecom value chain and being excluded from the world of services in the long term are not unfounded. Over 65 per cent of carriers worldwide are already witnessing a decline in voice traffic and SMS revenues due to the growing popularity of third-party solutions. As per industry estimates, carriers lost SMS revenues of $8.7 billion to social media messaging in 2010, $13.9 billion in 2011 and $25 billion in 2012. In 2013, it was estimated that operators missed out on about $34 billion of revenue from text messages, which is projected to increase to $54 billion by 2016.

The Indian experience

As far as SMS revenue cannibalisation by OTT services is concerned, Indian operators fare better than their counterparts in the rest of Asia and developed markets worldwide. SMS services have accounted for 5-6 per cent of total operator revenues in India, which is much lower than those in several global markets. For instance, SMS services account for 43 per cent of revenues in the Philippines, 23 per cent in Indonesia, 18 per cent in Singapore and 14 per cent in Malaysia. Thus, the potential erosion of SMS revenues by free instant messaging applications is yet to affect Indian operators in a big way.

Although smartphone penetration in India is rising, it is still low as compared to several other countries. Currently, smartphone penetration in India stands at 18-22 per cent as against 60 per cent in Europe and the US, and 70-85 per cent in China, Malaysia, Singapore as well as Hong Kong. Low smartphone penetration implies that it will be a while before the SMS revenues of operators are strained as smartphone ownership is a prerequisite for using free calling/messaging applications. However, these factors are a temporary reprieve for Indian operators. In the long run, the surging uptake of data services in the country would result in application developers directly competing with operators for revenue share.

To tap the popularity of these free chat applications, several Indian operators have started collaborating with OTT players. For instance, Reliance Communications (RCOM) and Aircel have partnered with WhatsApp and Nimbuzz respectively. In addition, Bharti Airtel and RCOM have tied up with Facebook for its messenger application.

The way forward

Clearly, the dynamics of telecom markets worldwide are changing. As more players join the telecom value chain, there will be a need for new arrangements amongst players in order for them to coexist. Given their wide network reach, operators would prove to be key partners for OTT service providers as about 80 per cent of application users access the internet on the move. On the other hand, OTT service providers can help drive data subscriptions and revenues for operators through their globally connected user platforms.

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