The Rise of OTT Players – What Is the Appropriate Response?

The Rise of OTT Players – What is the appropriate response?

17.12.2014 Detecon Contact

Dr. Werner Knoben Senior Partner Detecon Asia-Pacific Limited

Phone: +66 2 634 9013 Mobile: +66 89 900 2661 Fax: +66 2 634 9095 E-Mail: [email protected]

www.detecon-asia-pacific.com www.detecon.com

–2– © Detecon Content

1. Detecon – Who we are? 2. OTT – The Telco Challenge 3. Regulatory Take Away

–3– © Detecon Detecon – Who we are

Partner and Head of Delivery Detecon Asia Pacific: Dr. Werner Knoben

Area of studies  PhD in Mathematics: RWTH Aachen University, Aachen

Professional Experience  T-Com / Deutsche Telecom / Detecon – Partner: Bidding and Auction Strategies; War gaming; Regulatory strategies; Due Diligence; Scenario Analysis

Key Qualifications  Regulatory and wholesale strategy, market liberalization, competition law, regulatory costing and accounting separation  Auction Design, Auction Strategies, Game Theory, War gaming, Communication Strategy, Bid Strategy  Consumer and B2B strategy, Business Cases, Scenario Analysis

Selected Project Experience  TRA Oman: Setup of a 4G spectrum auction  NCC Nigeria: Setup of SMS and Data Interconnection Regulation  NBTC Thailand: Development of an Accounting Separation Framework  SingTel, Singapore: Auction and bid strategy and 4G license valuation Dr. Werner Knoben  TMMK/MKT, Macedonia: Regulatory Costing Partner  Advisor for Deutsche Telekom subsidiaries in Croatia, Hungary and Slovakia for regulatory strategies

–4– © Detecon Detecon – Who We Are

We are part of Deutsche Telekom Group, the number one ICT provider in Europe. Our goal is to leverage the strengths of the group in international markets.

Key Facts Deutsche Telekom Group

 USD 75 billion net revenue

 239,000 FTE employees

 1,500 headcount in group innovation and partnerships

 50.5 million fixed network lines

 123 million mobile customers

 Number one ICT provider in Europe

 Number one cloud provider outside US

 Strong international footprint

 Group vision: The customers’ first choice for connected life and work

Telekom subsidiaries T-Mobile offers mobile T-Systems delivers ICT Detecon is the provide integrated solutions and is the key solutions for corporate management consulting products and services for co-brand for OTT customers and public unit of DT Group, serving business and residential partnerships sector organizations to the group and other customers customers

–5– Detecon – Detecon International GmbH

Detecon’s global presence ensures that clients get access to the knowledge and know- how of telecommunications experts worldwide.

Key Facts Detecon International GmbH Worldwide Presence

 Foundation: 1954 – Diebold 1977 – DETECON

 Restructuring: 2002 – Detecon International GmbH

 Shareholder: T-Systems International GmbH

 Employees: More than 1,000 worldwide

 Turnover 2012: EUR 168 million

 Locations Germany: Cologne (head office), Dresden, Eschborn, Munich

 International Locations: Abu Dhabi, Almaty, Ankara, Bangkok, Beijing, Jakarta, Johannesburg, Moscow, Riyadh, San Francisco, Vienna, Zurich

 Webpage: www.detecon.com/en/

–6– © Detecon Detecon – Detecon Asia-Pacific Ltd.

Detecon Asia-Pacific Ltd. is focusing on wider South East Asian markets. We can build on successful client relationships that have developed over 25 years.

Key Facts Detecon Asia-Pacific Ltd. Presence in Asia

 Business Activities in Asia: Since 1985 Detecon Asia-Pacific Ltd.

 Foundation of Detecon Asia-Pacific Detecon China Ltd.: Regional Head Office 2005 Branch Office  Major Shareholder: Detecon International GmbH (99%)

 Employees: 45

 Turnover 2012: EUR 7 million

 Regional Headquarters: Bangkok

 Regional Branch Offices: Jakarta, Kathmandu

 Webpage: www.detecon-asia-pacific.com

–7– © Detecon Detecon – What we do?

We combine a rich service portfolio with a unique approach to consulting and in-depth knowledge of the industry.

Strategy and Marketing Technology Management Organization and Processes

 Startup and Launch Support  Network Rollout / Launch Support  Business Process Management  Marketing and Sales Strategies  Technology Strategy (Business Process Audits, Business Process Engineering  Wholesale Strategy and  Outsourcing, Managed Services Implementation including eTOM and ITIL), Process  Vendor Selection Optimization  Regulatory Advisory (Regulation  Network Performance  TOGAF Training and Certification Frameworks, Licensing, Lobbying) Management  Enterprise Transformation  Corporate Strategy  Network Operations Efficiency Management  Corporate Finance  Tool Based Network Planning,  Reorganization and Merger  Cost Optimization Design and Rollout Integration  Business Planning  ICT Strategy Organization  Human Resources Management  Business Development  Technology Innovation  Procurement and Supply Chain  Innovation Management Management Management  Green Technologies  Big Data Strategy  Financial, Risk and Compliance  Due Diligence and Investment  ICT Transformation Management Management Appraisal  Next Generation Data Centre  Corporate Social Responsibility  Enterprise Architecture Strategy and Management  Enterprise Service Management

Program Management, Project Management, Interim Management

–8– © Detecon Detecon – What we do?

We support regulatory authorities and operators since 1977 with our deep regulatory and sector reform knowledge and experience worldwide.

Sector Reform and Legislation Regulatory Policies / Procedures New Regulatory Challenges

Sector Reform Strategy  Regulatory market definition and  Fix-mobile convergence regulation  Review of given market situation analysis (e.g. pricing of mobile termination, national and international roaming,  Analysis and benchmarking of  Competition policy, SMP liberalization experience in other designation and remedies MNP, SMP evaluation, digital dividend, spectrum trading, re- countries  Licensing and Authorization farming, auctioning, …)  Examination of political, legal and  Universal service policy  Legal framework for eCommerce, economic implications  Tariff policy and tariff regulation eHealth and eGovernment  Elaboration of guidelines and  Interconnection and Access  Media, IT, telecom convergence policies for sector reform Regulation regulation (e.g. for content and  Numbering applications, IPTV, PPV, …) Communication and Competition  Dispute resolution  Technical and economic regulation Legislation  Market Monitoring and in an NGN environment, e.g.  Analysis of existing legal situation enforcement regulation  VoIP regulation,  Primary and secondary legislation  Consumer, Data and Privacy  Net neutrality and QoS,  Regulations and calculation Protection  NGA industrial policies, models (price squeeze, margin  Frequency spectrum allocation and  Next Generation Data Centre, squeeze, predatory pricing) management  Anti-competitive conduct (ex-ante  Network Resilience and QoS,  Standardization and type approval and ex-post)  OTT

Regulatory Strategy and Telecommunication / Broadcast / Spectrum Master Plans

–9– © Detecon Detecon – Clients Detecon Asia-Pacific Ltd.

Our Asian client base includes donor institutions, regulatory bodies, industry suppliers and telecommunications carriers across the whole region.

ADB .org

MCMC

UOB

Sri Lanka DGPT Telecom (SLT)

–10– Detecon – Selected Project Experience

A country view on completed projects proves that we are industry experts capable of dealing with strategic challenges as well as detailed implementation tasks.

Cambodia / Laos Thailand Malaysia Launch of CDMA Network Rural Telecommunications

WiFi Network and Business Audit Fiber Network Due Diligence Company Valuation Tendering Support

Accounting Separation Framework Spectrum Planning and Pricing

Business Process Review Network Evolution Strategy

3G Licensing Support GSM Network Due Diligence

Service Costing Network Optimization Support

Tender Support for UMTS / LTE Carrier Launch Pricing

LTE Spectrum Valuation Data Center Strategy Review

Shaping Enterprise Data Services Network Outsourcing Support Bangladesh Brunei Broadcasting Competition Policy WiMAX Bid Book and Tendering

Sector Reform and Liberalization Mobile Strategy Development Restructuring of Incumbent Costing and Pricing Models Interconnection Cost Modeling CRM Rollout Advisory on Tower Services BWA License Bid Support

Spectrum Utilization Concept Interims Management

–11– Detecon – Selected Project Experience

A country view on completed projects proves that we are industry experts capable of dealing with strategic challenges as well as detailed implementation tasks.

Philippines Myanmar IndonesiaMalaysia Frequency Management Business Planning

Strategic Market Entry Feasibility Network Planning Review Interim Management Buildup Support for Carrier Unit

License Bid Support Radio Network Planning

Rollout Management

Tendering for Managed Services Singapore Wholesale Business Strategy

Bid Management for Broadband Tower Growth Due Diligence

Network Resilience Review Frequency Lobbying

Roaming Study Bid Management for Suppliers

WACC Determination Transmission Planning Vietnam MNC Strategy / Implementation Core Network Swap

APEC Broadband Study NGN Migration Strategy Mobile Market Entry Strategy Billing Outsourcing Support

Internet Traffic Analysis Billing System Tendering Rural Telecommunications

–12– Content

1. Detecon – Who we are? 2. OTT – The Telco Challenge 3. Regulatory Take Away

–13– © Detecon The Telco Challenge

Core Telco markets are shrinking. As a result the pure access and transport business case becomes negative – and broadband goals might fail to achieve the targets.

The Telco Challenge  What does it mean for national Telco markets?

From growth…. ….to shrinking business

Sustainability of Business Model

 Operators losing from basic services (access and transport) PriceVolume Revenue  Decoupling from network and application layer

 Revenues from core Telco activities are declining.  New players are entering the value chain – resulting in fierce competition  Operators have to look for new sources of income

 Some operators have adopted a strategy becoming an integrated ICT solution provider Broadband Policy Goals  The economic value of access and transport is decreasing

 The pure broadband business case is getting How many operators unviable can sustain data center business?  Investment in and operations of ultra-fast and reliable infrastructure will fail to meet policy goals

–14– © Detecon Emergence of OTT

Over-the-top (OTT) players have entered the scene and have started to take away revenues from national Telco operators.

The Emergence of OTT  What does it mean for national Telco markets?

 OTT services penetrate the Internet What does it mean for  In voice and messaging services OTT attack the traditional Telco business national Telco markets?

OTT Communications on Mobile Handsets* 0% 10 20 30 40 50 60 70 80 90 100% Revenue Loss

Mobile voice  Significant loss of revenues in voice and messaging services SMS/MMS Email  Innovation backlog against OTT Social Networking IP messaging VoIP Level Playing Field of Regulation 2013 Video call  Uneven level of regulation, e.g. QoS, 2011 interconnection, pricing, universal service, Mobile Messaging by Service Type* convergence etc. 60  OTT tax evasion and collection problem

20 Policy and Social Goals of Regulation  Personal data and privacy issues hardly 0 addressable by national regulation Messages (trillions) Messages 2010 2011 2012 2013 2014 2015 2016 2017 2018  Security concerns hardly controllable OTT IP messaging Operator IP messaging SMS

Source: Analysys Mason

OTT will take ¼ of the total service market by 2014. Main drivers are cloud service offerings followed by e-commerce and search services.

Comparison of global Telco and OTT total market Breakdown of OTT service market 2017

[mn Euro] 1,306,702 Social 1,236,754 1,271,713 Other ads (press, portals, etc…) 1,170,769 1,201,587 1,146,330 8.98% 7.78% E-commerce (value added) Search 11.94% 18.14% Music 1.35%

402,381 Online games 6.48% 312,501 356,674 221,292 265,275 181,140 4.07% OTT video 0.71% OTT VoIP 8.58% 2012 2013 2014 2015 2016 2017 31.97% Paid mobile apps (including games) Cloud (excluding  In 2017 Telco will generate 1.3 trillion Euro, OTT 402 bn mobile apps) Euro

 OTT growth by a CAGR 2012-2017 of 17.3%, Telco 2.6%  Cloud service will develop into the largest service segment  Biggest CAGR comes from cloud services (21.4%), followed by OTT VoIP (16%) and social (15.9%)  Search and e-commerce will become secondary drivers, followed by social and mobile apps

Source: idate World Internet Service Markets 2014

The OTT universe is diverse. Particularly consumer applications are often funded by advertisement – operation itself is not profitable.

The OTT Business Models

OTT ClassesExample Revenue source Question of Profitability and  Advertisement Market Impact

OTT  Subscription for  Business application funded by users, Communications premium services consumer applications rely on  Free services advertising  Consumer applications hardly  Advertisement profitable – free service model has  Subscription for disruptive market effects OTT Media premium services  High valuation not justified by business  Transaction based figures. Market model focus is on  Free services establishing market presence rather than monetization  Transaction based  OTT are demand and innovation Commerce drivers, but …

 … with the current business model they extract value from national markets, and…  Advertisement  … take out resources that are  Subscription for Social Media required for broadband infrastructure premium services investment and operations  Free services

Operators have developed multiple responses to counter the OTT challenge – ranging from blocking to partnering.

How Operators Face the OTT Challenge

Strategic Blocking OTT Charge OTT Partner with OTT Offer own “OTT Offer “advanced Focus services provider for players services” integrated network use services”

Objective  Block certain  Monetize OTT  OTT  Rebuild OTT  Secure revenues OTT services to network traffic containment portfolio from high value secure revenues segments  Apply “eyeball  Complement  Integrate OTT  Make OTT principle” own portfolio service in  Capitalize on services (paradigm shift product bundle high value  Secure high unavailable or from ‘content is propositions value segments unattractive king’ to ‘access by service to end- differentiation consumer’ is king’)

Examples  None  None from MENA

1. Detecon – Who we are? 2. OTT – The Telco Challenge 3. Regulatory Take Away

There is an apparent imbalance regarding market and market entry conditions between licensed operators and OTT players. A new regulatory balance is not yet in sight.

The (un)-Level Playing Field

Regulation Licensed Network Operators OTT Players

Comparison of market  Subject to license and license  No license Licensing conditions fee required

 Network operator’s business Quality of  No quality  SLAs included in the license model is determined by Service requirements regulatory requirements

 OTT Players are usually free  No interconnect of such limitations Interconnection  Interconnection mandated requirements  Current market setups have  Not subject to not yet adapted to the new Universal  Usually subject to universal competitive situation Service service obligation universal service regime  Competition is  Subject to (enforceable) Consumer  No or little dysfunctional protection consumer protection policy enforcement power  Regulators punish network operators that Legal  Usually license condition invest in local interception  Country dependent infrastructure, are an important source for local employment and Taxation  Subject to national tax regime  Service dependent are local tax payers

Internet is leading to the convergence not only of services and business areas, but also of regulations and laws. The coordination of previously separate bodies is vital.

Organizational Convergence

At a minimum regulation of the following should be closely coordinated :  Financial services Broad- Mail Financial Communi- Personal  Data privacy and casting services services Communi-cations data protection regulation cations storage Media law Privacy laws Banking Legal  Broadcasting/publishing Content Crime laws interceptLegal Data laws prevention Data interceptPrivacy protection  Communications/ICT. Copyrights protection PrivacyData Privacy laws Freedom of Fin. protectionData Beyond this the integration of speech Regulation protection broadcasting, communications (and publishing?) regulatory bodies should be assessed and implemented if Internet Applications appropriate. Unified internet governance Coordinated, combinated and harmonized regulatory framework

There are six take aways for regulators. A framework for future action should be based on three principles.

Regulatory Takeaways

1. OTTs are taking parts of the value chain, because of the Separation of Principles for Action Network and application layer. i Regulation should secure 2. The access and transport business case is under pressure – with national infrastructure significant implication for the national infrastructure. deployment and operations

3. National Telcos are losing revenues. But in many instances: Nobody is gaining them! ii Regulation should not kill future business cases (by 4. overdoing interventionist Economic value is shifting away from the national to international action) markets, but the Infrastructure is (mainly) local.

5. National operators are developing strategies to counter the OTT iii challenge. Not all will succeed! Regulation should not protect non-performing operators 6. Policy goals are more difficult to fulfill. Implementation of social or security measures will become a bigger challenge.

Regulators have to discover new grounds. There are hardly benchmarks or best practices available. Some ideas have started to emerge.

Regulatory Responses

Develop more Confide in the Define framework for net Coordinate and market mechanism sophisticated combine neutrality broadband plans / Create and Allow business cases Regulation conserve a secure policies Operators and other based on QoS Balance policy goals with framework for an differentiation while companies need a efficient market profitability and develop of level playing field guaranteeing non- appropriate finance discriminatory ‚best effort‘ mechanisms, try to use access, develop a secure market mechanisms Make infrastructure framework for investments where possible Support self-sustaining creation of large Move away from all-you- retail markets can-eat flat rates. Achieve critical Regulatory action should volumes so that be based on access and Building blocks of customer access transport stand-alone regulatory action becomes a value business cases/cost (eyeball) models. Access gaps to be re-defined

 Music industry (all-you-can-eat streaming could kill It is a young discussion. the value of the content) Also look for developments in other  Print media (free content could kill quality papers) industries  […]

Thanks for your attention

Dr. Werner Knoben Senior Partner Detecon Asia-Pacific Limited

Phone: +66 2 634 9013 Mobile: +66 89 900 2661 Fax: +66 2 634 9095 E-Mail: [email protected]