OTT Profits and Peril in International Voice Rates

By Doug Mohney October 11, 2013

A couple of years ago, I was talking to a (then-independent) Skype executive. He bragged about how Skype was making money from IP-based international calling along with 40 percent of communications traffic was video. 

"Well, how do you make money when everyone is either doing Skype-to-Skype or video calling?" I asked.  "There's no revenue source." He laughed and said something along the lines of, "I'll be retired and gone by then."

It's 2013 and Skype is now a division of Microsoft, with its underlying technology being streamlined and rolled into everything from Windows to Lync. TeleGeography pegged Skype as carrying about 33 percent of international telephony traffic in 2012, a whopping 167 billion minutes. 

But the question remains, what happens when the PSTN goes away?  Or if carriers get more competitive with international rates? 

Image via Shutterstock

T-Mobile US fired the first shot across the over-the-top (OTT) bypass bow earlier this week with its International flat-rate calling plan. The max rate per minute is $0.20, including mobile-to-mobile calls. Compare that to Skype's rates today (Oct. 11, 2013) when it terminates a call on various mobile networks: Australia, $0.208, France $0.209, Germany $0.253, Italy, $0.308, Poland $0.255, South Africa $0.238. 

Roll in unlimited international texting to the T-Mobile footprint and suddenly a "vanilla" mobile phone service goes back to being cost competitive against OTT pricing within certain areas. Other international carriers have to be working their spreadsheets and thinking ,"We can do that too, especially since Skyprosoft is sucking up a third of the market."

One of the deepest desires in the hearts of service providers is to own the customer. OTTs dilute that relationship and cut into average revenue per user if international long-distance is factored in. Rather than having to worry about Rich Communications Services (RCS) implementation to woo back customers with a "carrier" OTT service, the cleanest way service providers may have in winning back customers is to lower and implement flat-rate price plans.

Simplified pricing may bring other benefits to carriers in the form of lowered accounting overhead. Calculating and working out settlement pricing between carriers is non-trivial, supporting an army of accountants around the globe. 

Regardless, if T-Mobile US triggers a larger downward shift in international long-distance calling rates, OTT players may not be as comfortable as they are today. If an OTT player can offer rates lower than existing carriers while using the same broadband pipes yet lacking the economies of scale, it is not unreasonable to think that service providers could (sooner or later) figure out how to offer a "clean sheet," lower cost service. Or just drop pricing to see what happens.

Sure, OTT players sell in-line advertising within the client application, various "value added" business services, and other bells and whistles. But the big money maker is on offering lower-cost long-distance rates. If that cash cow dries up, I suspect many OTT firms will find themselves hard pressed to find other revenue sources.

Edited by Alisen Downey

Contributing Editor

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