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App Alliance: Symbiotic relationship with OTT players is the way forward

October 31, 2014
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Owing to the high adoption of over-the-top (OTT) services, and the shrinking size of voice and SMS revenues, telecom operators are facing increased competition from the fast growing OTT service providers. As their business model is being impacted due to these services, operators are now trying to either collaborate with OTT players or launch their own applications. Further, operators have called for the regulation of OTT services, which is still being debated by policymakers. Industry experts share their views on the growing significance of OTT players and their impact on telecom operators’ business…

Kunal_BajajSathish_GopalaiahInderpreet_KaurRomal_Shetty

How have OTT services evolved in India in the past few years? What has been the performance of some large OTT players in the country?

Kunal Bajaj

Prior to the widespread smartphone adoption, most of the value-added services (VAS) were essentially provided by telecom service providers, along with voice and messaging services. Typically, operators provided services to end-consumers. But now, with OTT service providers and applications-based services, anything is accessible on a smartphone, enabling service providers to find a new way to reach out to consumers through marketing and advertising, independent of operators.

The performance can be measured mainly in terms of usage and uptake. In the past one year, we have seen a lot of adoption of applications like WhatsApp and other utility applications. Meanwhile, local applications like Hike for messaging, Paytm for commerce and Flipkart for shopping are also gaining traction. From the monetary perspective, we currently do not have a sufficiently matured market, as the majority of the applications are ad dominated and not transaction dominated. Therefore, we do not see a very favourable economics here.

Sathish Gopalaiah and Romal Shetty

The past couple of years have witnessed phenomenal growth in OTT services. OTT players have gained a significant advantage by reaching out to end-consumers directly. Meanwhile, these players are partnering with smartphone and other device manufacturers to increase their footprint.

Till the early 2000s, the application ecosystem was restricted to pre-installed applications on mobile phones. Starting out as providers of basic communication services, OTT players have evolved into full digital content service providers. TV, radio, news, video, music, voice over internet protocol, etc., can no longer remain oblivious to the OTT presence.

The rising popularity of OTT applications can be deduced from the subscriber base of the key players. WhatsApp, the most popular messaging application, has a significant number of active subscribers from India. The social networking giant Facebook has seen India emerge as one of its largest and fastest growing markets. The majority of its users access it on their mobile phones.

Inderpreet Kaur

The drivers for the growth of OTT services in India are rapidly scaling up. Along with the drastic decline in 3G data pricing, the availability of convenient data packs and low-end smartphone vendors are helping lure the Indian consumer towards these services.

The demand for these services has grown tremendously, with leading OTT players forming strategic partnerships with key device vendors and operators. OTT players and telecom operators are also collaborating to target a wider set of consumers who either do not own a smartphone or are still to adopt mobile data. In this regard, Bharat Sanchar Nigam Limited recently collaborated with U2opia Mobile to offer Facebook on mobile phones that are not connected to the internet.

Partnering with operators that have already built a strong subscriber base has helped OTT players gain a significant presence in the country. While international players were quick to sense the opportunity offered by the changing Indian telecom market, their success has encouraged many local providers to scale up their operations too. Hike, for instance, has developed a strong base of 20 million users in India.

The next set of challenges for OTT players would mainly include monetising their subscriber base. The providers are now exploring in-application purchases, brand partnerships (advertising) and stickers as means to generate revenues from the existing user base.

What has been the impact of these services/ operators on unified telecom licensees?

Kunal Bajaj

Over the world, the application system has matured with the presence of competition from OTT players with various messaging applications. With the increase in their adoption, OTT applications have taken SMS revenues away from service providers. Similarly, as consumers increasingly opt for Skype for video calls and Google Hangout for videoconferencing, voice revenues for operators will get eroded. So OTT players pose a competition to operators, who now need to take proactive steps.

Sathish Gopalaiah and Romal Shetty

Impact on financials: OTT applications have, over time, substituted traditional voice and messaging services of service providers, resulting in frazzled margins and diminishing revenues. The data traffic growth has failed to translate into equivalent revenues.

Impact on the business model: Direct reach to consumers, innovative service propositions, pre-installation on smartphones, word-of-mouth marketing and aggressive pricing of OTT services have resulted in a drastic change in the business model of operators.

OTT content is no longer restricted to messaging and voice services and has invaded operator-dominated SMS-based VAS such as news, horoscope, music, video and sports updates. Besides, handset vendors have also joined the OTT bandwagon and started launching their own free communication applications. The emergence of new players in the OTT domain has led to a transition from the call/text pricing model to the data/mobile application pricing model.

With the high adoption of OTT services, how do you see the future of telecom companies in terms of the creation of substitutes to compete with OTT applications?

Kunal Bajaj

Telecom operators are not necessarily the ones to create substitutes. OTT services have a community and perhaps telecom operators will have to do the same. Even though Hike has partnered with Airtel, it is created independent of Airtel, which is the reason for its success. However, it is going to be difficult for operators to create success through community because their DNA is very different from that of OTT service providers.

Sathish Gopalaiah and Romal Shetty

Mobile operators across the world have reacted in different ways to the OTT services threat. While some have embraced these services and started offering app-centric data plans, others have started investing in the in-house/outsourced development of operator-owned OTT applications to compete with OTT services. Based on their business goals, the strategy differs for each operator.

Existing strategies by operators: Some global operators have already started exploring partnerships with OTT players to embrace OTT ecosystem. These partnerships have slowly started resulting in the operator emerging as a distributor of OTT services through revenue sharing agreements.

Meanwhile, many operators have come out with their own OTT content. They have started developing their own multimedia application stores loaded with offerings like video, music, on-demand services, utilities, games, etc. for subscribers.

Future strategies by operators: Owing to their proximity to consumers and their consumption patterns and demands, many operators stand a profitable chance for providing managed and functional services to OTT players. For instance, telecom operators have adequate network capabilities and consumer insights to handle the entire consumer relationship function of an OTT player.

Further, enterprise mobility has contributed to the rise of enterprise OTT applications. Being the communication solution provider for most enterprises, telecom operators and OTT players can jointly explore opportunities in the enterprise segment.

Inderpreet Kaur

Operators in India have been under tremendous pressure due to their shrinking voice revenues and the increasing adoption of OTT messaging services, denting their SMS revenues. Ovum believes that by 2016, operators globally will have lost $54 billion in SMS revenues due to the growing popularity of online messaging. Operators have mainly responded to the situation by either partnering with OTT players or by launching their own applications. However, the success of the latter would depend largely on service differentiation and interoperability or platform independence of the service.

The recent launch of Wynk, an OTT music streaming application from Bharti Airtel, is a good case in point. The success of Wynk can be attributed to comparatively lesser competition in the market. Dhingana and Flyte were recently shutdown, leaving the Indian market with just two large music streaming players – Saavn and Gaana.

Which business model would suit operators the most – the development of in-house applications or partnerships with OTT players?

Kunal Bajaj

Partnerships with OTT service providers are the key for operators. For instance, Tata DOCOMO partnered with Saavn, Airtel partnered with Hike, and some operators partnered with WhatsApp as well as Facebook.

In addition to specific partnerships, operators also have an opportunity to enable micropayments. Therefore, apart from advertising revenues, the other way to monetise applications is through micropayments, which involve charging small amounts for features in a game, such as allowing consumers to buy more lives and special powers, by payments of Re 1, Rs 5 and Rs 10. It is practical to use the existing financial ecosystem for such transactions. Telecom operators are used to these micropayments through voice and messaging as they have been doing so for a long time. If they can find innovative ways to enable OTT players to use such microtransactions, it will give them another platform to work on with OTT players.

Sathish Gopalaiah and Romal Shetty

For an incumbent, both models, the development of in-house applications and partnerships, will be viable options. In-house development will allow them to monetise their network investments as well as generate an additional revenue stream. However, this may compel an operator to venture into a non-core business.

For smaller and newer operators, limited capabilities and investment power may make a partnerships appear as the best-value proposition. This will allow them to offer a larger bouquet of services to their consumer base, thus appearing as an attractive solution provider while still focusing on their core business.

What is the case for regulating OTT services? What has been the international experience so far?

Kunal Bajaj

There are basically two sides of OTT regulations, primarily within a concept called net neutrality. Consumers, service providers and OTT service providers believe net neutrality is how the internet is created and that anybody who is providing a pipe will have to impartially provide access to the pipe to everybody on the internet. But telecom operators are of the view that they have been making all the investments in setting up network infrastructure while OTT providers have been reaping the benefits because the former are acting as just the channel. So this discussion is expected to continue for a long time and no clear resolution is necessarily going to come out of it very quickly. However, currently, ensuring benefits to consumers, along with creating a competitive environment and net neutrality is very critical.

The Telecom Regulatory Authority of India (TRAI) discussed with stakeholders the regulation of OTT services, since some of OTT players are providing services such as messaging or voice calls, thus impacting telecom operators. However, TRAI also wants to make sure that the messaging applications have the right kind of security so that appropriate security, monitoring and solutions are in place.

Sathish Gopalaiah and Romal Shetty

Regulators across the world have reacted differently to OTT services. Regulations range from net neutrality rules for creating a level playing field, charging consumers for the use of OTT services, to the payment of carrier charges by OTT players to operators. As of now, the floor for discussion on OTT services is still open. Policymakers will have to delve deeper into the current and future nature of the services while formulating regulations. The key aspects to consider include encouraging the continuous development of the mobile ecosystem, penetration and indispensability of OTT services, and security related concerns.

Inderpreet Kaur

TRAI recently rejected the proposal of operators for regulating OTT services. Internationally, regulators, mainly in European countries, have been propagating strong net neutrality requirements to ensure that operators treat all data traffic equally. The European Parliament has voted to restrict internet service providers from charging OTT players for non- discriminatory access to their networks. The law also prohibits service providers from blocking OTT players. In the US, however, Netflix is paying for preferential treatment on the country’s largest cable broadband provider’s network.

At the same time, we have instances of very strict interpretation of the net neutrality principle, which prevents operators from favouring certain social networks. This has ended up damaging the agents (content providers and consumers) in the market that the rule aimed to protect.

 
 
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