OTT Messaging: Impact and Reactions

February 2014 Aditi Olemann

OTT Messaging: Impact and Reactions

1. Rise of OTT and its impact 2. Reactive strategies to the OTT phenomenon 3. An alternate view: OTT not cannibalising SMS

Messaging- SMS and the rise of OTT

1994
SMS hits first 100 billion target The birth of SMS

1999 2000 2007

MMS Service launched

Average number of messages sent per day (billion)

45 40 35 30 25 20 15 10

Smartphone market explodes with the advent of iPhone

WhatsApp: 300m users Viber: 200m users Kakao Talk: 90m users Line:150m users WeChat: 300m users

Tipping
SMS OTT Messages

2009
2013

Whatsapp launched in 2009, Viber and KakaoTalk in 2010

5 0 2011 2012 2013

Source: Informa Telecoms & Media, EY research.

Messaging- SMS and the rise of OTT

1994
SMS hits first 100 billion target The birth of SMS
90 80 70 60 50 40 30 20

Predicted Loss of Operators in $bn

1999 2000 2007

MMS Service launched

Smartphone market explodes with the advent of iPhone

WhatsApp: 300m users Viber: 200m users Kakao Talk: 90m users Line:150m users WeChat: 300m users

10

2009
2013

Whatsapp launched in 2009, Viber and KakaoTalk in 2010

0 2012 2016 2020

Source: Ovum.

Region-wise Predictions
Technology Readiness Social propensity to adopt OTT

Drivers

Cost Incentive to adopt OTT

Strength of OTT alternative

Region-wise Predictions
Netherlands, South Korea, Spain
Social propensity to adopt OTT Technology Readiness

Canada, United States, Italy

Drivers

Cost Incentive to adopt OTT

Brazil, India, China

Source: McKinsey & Company Telecom.

Strength of OTT alternative

Operator Strategies to counter the OTT threat

Offensive

Strategy
Block OTT messaging services to protect Telcos SMS revenues
Throttling OTT services OTT app development

Challenges
New business unit creation

Dependent on net neutrality policies of the country and competitiveness of the market Prone to criticism for curbing customer choice1

Example
Regulators in Vietnam and Egypt are moving closer towards banning OTT services.2 In 2012, Korean regulators allowed data throttling by Telcos (KT, SK Telecom) to control proliferation of OTT messaging services including Kakao Talk.
Sources: Gatner1, Reuters2

Joint product development and promotion Charge premium from customers Defensive Tactical

Strategic

Operator Strategies to counter the OTT threat

Offensive

Strategy
Opportunistic approach: Objective charging for data Charge customers a premium for OTT services to ride on the OTT wave.

Throttling OTT services OTT app development

Challenges
New business unit creation

Customer dissatisfaction churning over to other service providers

Example
China Mobile and China Unicom announced that they would provide a standard payment plugin for app users and developers, which they hope will allow them to take a greater share of the payments made for mobile apps in the worlds largest mobile market.

Joint services and promotion Charge premium from customers Defensive Tactical

Strategic

Operator Strategies to counter the OTT threat

Offensive

Strategy
Develop own OTT services: in-house, acquisition, or outsourcing Re-establish consumer relationship Establish itself as an innovator Leverage core assets (eg. customer care and distribution channel) to differentiate OTT offering
New business unit creation

Throttling OTT services OTT app development

Challenges
Lack of software and IT expertise High upfront investment Unpredictable ROI Stiff competition from OTT companies Potential cannibalization of SMS revenue.

Joint services and promotion Charge premium from customers Defensive Tactical

Example
Telefonica TU Me T Mobile Bobsled Orange Libon

Strategic

Operator Strategies to counter the OTT threat

Offensive

Strategy
Collaborative approach: Partner with select OTT players and leverage core competencies to enhance OTT services Share revenue or charge fees for offering services (eg. guaranteed QOS, customer care) Acquire new customers who are loyal to particular OTT brands

Throttling OTT services OTT app development

New business unit creation

Challenges
OTT remains the consumer facing brand in collaboration. Lack of exclusivity in the deals

Joint services and promotion Charge premium from customers Defensive Tactical

Example
Reliance and Whatsapp Airtel and Facebook
Strategic

Operator Strategies to counter the OTT threat

Offensive

Strategy
Enable Rich Communication Services: a new crossoperator standardized communication service Long term and highly strategic solution

Throttling OTT services OTT app development

Challenges
New business unit creation

Offering competitive solutions to OTT with alternative applications

Example
Consumers can identify the presence of these RCS services through the joyn brand. Telcos such as Telenor, Orange, Telefonica, T-Mobile, Vodafone etc. are attempting to create this new standard, an initiative led by GSMA.

Joint services and promotion Providing services to OTTs Defensive Tactical

Strategic

RCS Deployment

Source: GSMA, Rich Communications

An alternate view: OTT not cannibalizing SMS

The Netherlands
The Netherlands is the second most expensive mobile market in Europe. Over the last 3 years, the whole market has contracted subscriber numbers have declined, voice revenues are declining, nonvoice revenues are under pressure, SMS revenue has declined.

South Korea
Although overall use of OTT has become very popular, but average SMS usage per person has decreased only by about 2%.

Source: Portio Research

An alternate view: OTT not cannibalizing SMS

Spain North America
Between 2009 and 2011, the market became unsustainably inflated, and subsequent drop-off was inevitable. Market has witnessed declining subscribers, declining revenues and declining SMSs for several years. Cannot determine if OTT is the reason or declining economic conditions.

Source: Portio Research

The Way Ahead

1. A number of initiatives are underway. Innovation is key. 2. Pricing will be critical. 3. Exposure varies significantly between operators/countries.