OTT services have cut into profits
OTT SERVICES HAVE MASSIVELY CUT INTO CARRIER PROFITS FROM MESSAGING AND VOICE, BUT COULD PARTNERSHIPS WITH OTT VIDEO PROVIDERS OFFER THE NEXT BIG REVENUE STREAM?
For years, Over-the-top (OTT) services have been pitched as one of the biggest challenges faced by the telecoms industry. How can carriers, with their huge networks and massive operating expenditure, compete with the likes of Whatsapp or Skype, who need only a few data centres and some software to run? As people have switched away from traditional voice calls and messaging services to voice over IP (VOIP) and digital messaging platforms carriers’ profits have slumped.
GFK analyst Imran Choudhary said: “As smartphones brought with them the app revolution, data has become more important as a key component within the new operating model for carriers. However, as consumers use more data through OTT services, there has been a greater strain placed on carriers to improve network infrastructure to be able to facilitate such high data use.”
Choudhary points to research that data-driven revenue now makes up a quarter of income for some European carriers, up from 12% a few years ago.
“With the backdrop of a consolidating European carrier market and a tightly competitive landscape in the US, carriers need to meet the long-standing consumer expectations of lower data prices year-onyear, while delivering margin and profit to investors at the same time. Given this, and the fact that infrastructure improvements to facilitate growing data demand require a high level if capital expenditure, many carriers are looking at ways to ensure they capture and monetise the next wave of increasing consumer behaviour.”
However, with new power comes great opportunity, at least according to CCS Insight analyst Paolo Pescatore, who claims carriers have already lost the battle for messaging and will soon lose voice calls, so must look at other OTT partnerships and services to make additional revenue.
“They have lost the game in messaging, and video is now the new voice,” he explained. “There is so much focus on messaging and voice because that is the bread and butter of the telco business today, but what has been ignored is video. There is a significant opportunity there for the telcos to embrace the OTT video providers – the likes of Netflix and so on.
“With almost 90 million subscribers globally, and having launched in 200 countries, customers have clearly experienced a healthy appetite for its services. In OTT video, Netflix can be a frenemy for the carriers. It needs the telcos more than ever right now, given its limited resources to expand its brand.
“In the US there are over 100 OTT providers, and they lack a traditional billing relationship with their customers. Traditionally, the model for pay TV has been through a cable operator. However, now they want to go direct. Who is best equiped to do so than telcos, given their extensive network assets? Telcos don’t want to spend an enormous amount of money securing content when they have to invest in their network.”
Examples of partnerships between carriers and OTT video providers include Netflix’s agreement with BT. Answering a question from Capacity at a recent conference, BT chief executive Gavin Patterson explained how the UK incumbent’s relationship with the likes of Netflix and Google worked to benefit both parties: “Telcos and service providers have to create the right environment where the best of the internet can be brought to our customers. Moreover, we have to adapt our business model if we are not at the forefront of that innovation.
“So, for example, we have a commercial relationship with Netflix. We cache them deep in our network, which obviously improves the customer experience, but also reduces the peering costs. We also integrate them into our EPG on our TV platform, so we can work together to drive adoption of fibre, and that is just one example. We have a similar relationship with Google.”
Indeed, this is the solution vendors are favouring as one of the next key evolutions of network infrastructure. Take Huawei, for example, which at this year’s Ultrabroadband Forum in Frankfurt told Capacity that video would be the key driver of Gigaband – the next generation of connectivity.
Eric Xu, deputy chairman of the board, rotating CEO, Huawei, said: “When we deep-dive into global telecom operators’ successful deployments in the video industry, we discover that all of them have a well-developed video strategy, which is designed to drive the growth of broadband services.
This will also increase the number of broadband customers and the Average Revenue Per User (ARPU), instead of merely positioning video services as a value-added service.”