After years of promised disruption in the telecommunications industry, 2016 will be the year we experience the telecom tectonic shift. Traditional carriers and OTT players are now entering into a direct competition that will drive a material change across the entire ecosystem.
Major news events, like Apple’s (News - Alert) battle with the FBI over mobile encryption and Brazil’s investigation into WhatsApp, demand and capture our attention. But from an industry perspective, these events are mere precipitates to a much larger set of deep-seeded issues within the global communications landscape that will fundamentally change the way we look at the telecommunications industry.
The tensions between traditional carriers and the OTT providers are reaching an inflection point – we are about to witness the transformation of telecommunications and witness how this will take shape globally.
Prelude to Disruption: The OTT v. Carrier Battle Finally Begins
The advent of OTT voice, text and messaging solutions is becoming very troublesome for traditional carriers. After years of sitting on fat, dependable revenue streams from infrastructure, bandwidth and subscription plans, carriers are facing a new age where they see zero revenue and network usage from OTT apps that give consumers the ability to call anyone, anywhere as long as they have a VoIP app and a Wi-Fi connection.
A business model dependent on cellular and data usage is now facing a market where neither of these exist for millions of consumers. Even though OTT apps like this are not true mobile solutions or viable alternatives for everyone, the impact on the carrier is the same – some analysts believe Skype (News - Alert), WhatsApp and other OTT apps will result in the loss of almost $400B in revenue by the end of 2018.
This is forcing carriers to look for alternative revenue streams, modify their business models, or to simply block OTT applications outright – creating a zero sum game where everyone potentially loses, especially the consumer. These market forces are creating the need for solutions that bridge the carrier/OTT gap, creating partnership opportunities that will lead to the emergence of the new, modern telco – one that will be able to provide premium, high quality services with the reliability of a carrier at the cost advantage of an OTT.
Tomorrow’s Today — or at Least, Sooner Than You Think
Here are the three primary characteristics of the new, modern telecom:
1. Eliminating Infrastructure Costs to Bypass Carrier’s Inherent Advantage
The wireless industry has always been tremendously capital intensive. After two years of peak CAPEX spending by the top four wireless carriers, 2016 is predicted to see a drop of 8% to about $41 billion – most of which will go to maintaining existing networks, improving coverage and increasing capacity. For some perspective, Facebook’s (News - Alert) revenues were $17B in 2015.
Carriers have spent trillions of dollars on infrastructure—building it out and then improving it so it’s better than their competitors, creating near ubiquitous networks with a sustainable subscription revenue model. The problem with this model is that the key to sustainability is continuing CAPEX spending to build and improve. The carriers and revenues continue to get squeezed by growing competition and downward price pressures. The margin for each user continues to drop – but the carriers need to continue to high capex expenditures to keep their networks going.
The sustainable business model that has carried the industry for years is finally running out of gas.
For the modern telecom, this is a huge opportunity, if it can leverage the existing infrastructure to unlock the value in current networks. Entering the market with virtually zero cost structure is a radically different approach and presents a new way to reinvent the market, but will require …
2. Differentiated Technology That Can Drive Greater Cost Advantages
There is no doubting telecom’s disruption—past, present and future. OTT has made sure of that. We see it in the apps we use every day. SMS—once a key revenue generator—has been supplanted by the emergence of the messaging app.
OTT has created a blueprint for beating the traditional telecom on services and features, but ultimately has run into a significant problem – the ability to generate revenue.
The failure to monetize OTT has been written about extensively, primarily because OTT apps are closed, fractured communities reliant on VoIP. The promise of VoIP has been vastly overstated and mistakenly cast as a true mobile solution. VoIP can compete on price, but from a services and reliability standpoint, VoIP is a poor replica of a true telecom solution. Anyone who has compared the quality and reliability of a VoIP call with a cellular call understands this.
The cost advantage is fleeting as well. Most OTT apps are locked into app-to-app communities to make a call or send a message. Using an existing OTT app to call or text a number outside of that app is incredible expensive and changes the OTT cost advantage. Consumers are charged exorbitant rates for data usage, limiting the utility and affordability of the VoIP app.
This why OTT is characterized by ill-defined revenue models. People may love WhatsApp, but they will never pay for it. This is why OTT has failed to monetize the trillions of dollars invested in the embedded infrastructure and why the modern telecom must…
3. Combine the Traditional Telecom Reliability and Quality with the OTT Cost and Feature Advantages
The future of mobile communications will be based on control, privacy and the ability to integrate differentiated, revenue-generating services into a single application. The market forces of the past 20 years have driven us to the point where this is possible.
Carriers competing on connectivity have created a massive overabundance of supply. This “race-to-zero” for both wired and wireless connectivity is turning the concept of carriers as ‘dumb pipes’ into a reality.
The modern telecom will have a unique ability to capitalize on the commoditization of the carrier’s previously defensible “connectivity services” and use this infrastructure to deliver highly differentiated, reliable apps with OTT cost and features. This will result in the ability to leverage the trillions of dollars of embedded global infrastructure to provide the highest quality services at a fraction of the cost of existing providers.
Nicholas Hurst is the Manager, Strategic Planning & Finance for Flyp, a US-based telecommunications company.