“Over-The-Top” (Ott) Players in the African Telecommunication Sector

CHALLENGES AND IMPACTS CREATED BY “OVER-THE-TOP” (OTT) PLAYERS IN THE AFRICAN TELECOMMUNICATION SECTOR

The arrival of Over-the-Top (OTT) players creates numerous challenges for telecom operators in Africa, cannibalizing their voice and SMS revenues while increasing video traffic on the 3G/4G networks at a time when operators need to invest in infrastructure.

AUTHORS Given this, the actors (telecom operators, governments, regulators and the OTT players) face a range of questions:

// What is the extent of the OTT threat to African telecom operators?

// How do regulators address the regulation of OTT players on other continents?

// What levers can enable operators to protect their revenue and margins?

// How should relations between the OTT players and operators evolve in Africa?

// What should African states and regulators do to promote the necessary investment efforts in 3G/4G networks and fiber optics? PHILIPPE PESTANES [email protected]

VICTOR MARÇAIS [email protected] OTT PLAYERS: A GROWING confrontational and more inclined to par- investment in infrastructure by the telecom operators at a level that can cope SEGMENT CHALLENGING tnership as operators migrate their revenue models towards data; a similar picture to that with the dramatic growth in data traffic (particularly due expanding video TELECOM OPERATORS seen today in advanced countries. services). The dash for OTT services has led to the creation of groups that are, at times, eclip- OTT AND INTERNET PLAYERS A MASSIVE USER BASE sing the traditional telecom operators. OTT Strictly speaking, most Internet services players include both actors in communica- are OTT services, in that they use the tele- The actors providing these OTT services are tions services (WhatsApp, Skype or Viber) com operators’ networks and bring value to the US Internet groups known as “GAFA” as well as audio and video (Netflix, Deezer, users, but without the telecom operators (Google, Apple, Amazon, and Facebook), YouTube). being involved in the development, sale or but also players from other continents, like provision of these services to customers, and the Chinese Youku, the Israeli Viber, and the While their arrival in Africa is inevitable, consequently, without generation of revenue French Dailymotion. it poses challenges to telecom operators, for them. Potentially, then, this is an issue for In terms of the audiovisual landscape, the and to the authorities and regulators, at a all Internet players, as shown in the diagram video hosting website, Youtube, (owned by time when African operators need to invest below. We will use a more limited definition Google) can now count on some one billion in 3G/4G and optical fibers, and manage a of OTT services, defined as being those users (since May 2013), maintaining its status transition in their revenue model from voice having a significant impact on the econo- as the undisputed leader. In second place to data services. mics of telecom operators: is the global audiovisual OTT player, Youku, If regulators might be tempted to block // Over IP (Internet Protocol) communica- with more than 256 million unique visitors or limit such services, these measures can tion services such as VoIP, instant mes- every month, making it the leading online only be temporary, and they will have to sages (e.g., those provided by Skype, video platform in China. Viber, Whats’App, and Facebook). find other measures to support the tele- These services are in direct competition com operators (for example, tax incentives, WhatsApp, for its part, is the big winner in with the services of telecom operators: OTT communications with its 990 million etc.). Relations between operators and voice, SMS, MMS, etc. OTT players, and also with infrastructure users, followed by its parent group’s applica- // Audio and video services which put investors, will progressively become less tion, Facebook Messenger (with 800 million heavy pressure on the volumes of data users), and then Viber (610 million users). carried over the networks, requiring

OTT and internet players

INTERNET PLAYERS OVER-THE-TOP

PORTALS MERCHANTS INTERMEDIARIES AUDIO/VIDEO COMMUNICATIONS

Google Jumia Airbnb Netflix Telegram

Yahoo! Amazon Tripadvisor YouTube WhatsApp

Bing Zando Uber Vimeo KakaoTalk

Yandex Konga Freelancer Deezer Viber

Baidu Takealot Booking Dailymotion Messenger

Cdiscount BlaBlaCar Spotify Wechat

Tisu Skype

Alibaba Tencent

2 CHALLENGES AND IMPACTS CREATED BY «OVER-THE-TOP»

Number of visitors/users/subscribers *données à mai 2016

Communications OTT players

WHATSAPP WECHAT (FACEBOOK) (USA) 900 (CHINA) 600 millions millions

FACEBOOK MES. LINE (USA) 800 (JAPON) 560 millions millions

VIBER 610 SKYPE 300 (ISRAEL) millions (USA) millions

Audiovisual OTT players Video services Audio services

YOUTUBE (USA) NETFLIX (USA) SIRIUS XM (USA) APPLE MUSIC (USA) 1 65 23 11 milliard millions millions millions

YOUKU (CHINA) AMAZON (CHINA) SPOTIFY (SWEDEN) DEEZER (FRANCE) 256 15-40 20 6 millions millions millions millions

VINE (USA) HULU (USA) 200 9 millions millions

OTT services are used by more than a third // Multi-devices: OTT services can also also offer new features (accessibility on of the world’s population and are growing easily be accessed from a computer, different devices, a simplified customer rapidly, as a result of them offering a number smartphone or tablet via apps, while experience, rapid exchange of mes- the services of the mobile operators, sages, rich communications including of advantages over the services of telecom such as SMS and MMS, have been voice, and message, photo, and video, operators: “built” to run on mobile only. in a fluid and simple manner).

// The absence of borders: OTT players // The price, and richer functionality // The major paradox is that the quality of can easily offer their services across a The OTT players’ free communication voice communications is often better number of countries while, by design, services compete directly with the via an OTT service than using a paid- telecom operators are linked to the operators’ voice and SMS services, but for voice service on 2G networks. In the country they operate in. late 2010s, it was therefore possible to have free voice communications,

3 Countries of origin of the main ott services

OTT communications services OTT audiovisual services

*données à mai 2016

in high definition, on Viber or Skype Capitalizations that significantly outstrip those and pay dearly for the same virtually of telecoms operators (October 2015) inaudible and regularly cut-off international conversation on a 2G network... the challenge is far from being about TELECOMS OPERATORS ($ BILLION) TECH AND INTERNET ($ BILLION) tariff only. China mobile 250 Apple 630 Verizon 174 Google 440 Facebook 260 OTT PLAYERS PRESENT AT&T 170 Amazon 250 A PICTURE THAT MARKETS NTT DoCoMo 150 Alibaba 232 Vodafone 85 CONSIDER ATTRACTIVE Priceline 64 77 Deutsche Telekom Netflix 45 America Movil 56 Ebay 31 Dynamic growth and high Telefonica 55 Yahoo 29 capitalization Orange 40 LinkedIn 25 The business models of OTT players are Telecom Italia 20 Twitter 18 compelling for investors: the capitalizations of the biggest Internet actors are well above those of the telecom operators. While the market values of the two largest

4 CHALLENGES AND IMPACTS CREATED BY «OVER-THE-TOP»

global operators, China Mobile and Verizon, privacy, their effect on the security of states unlimited use of Facebook. Fast lanes would amounted to $250 and $174 billion respec- against a backdrop of strengthening global be allowed to provide certain services that tively, in October 2015, those of Apple and terrorism, and the free flow of data across cannot operate without such prioritization, Google had reached $630 and $440 billion, telecom operators’ networks (something such as very-high-definition IPTV services respectively. known as “net neutrality”). or video conferencing.

The principle of net neutrality, as reaffirmed The attitude of regulators remains more A FAVORABLE REGULATORY in the United States and Europe, is favo- restrictive in some countries in Africa, the ENVIRONMENT FOR OTT PLAYERS, rable to OTT players Middle East, and Asia, where OTT services are sometimes banned. In Morocco, at the BUT VARYING ACROSS REGIONS In the USA, the Federal Communications start of 2016, the national agency for tele- Commission (FCC), the communications communications regulation judged that VoIP regulator, recently reaffirmed the principles A lack of balance in regulation services provided by OTTs should be subject of neutrality with regard to services, appli- between OTT players and telecom to licensing. It asked the operators to block cations, and legal content. Three obligations operators these OTT services, triggering a significant are applied to telecom operators in terms of OTT players differ from operators not only public reaction, in particular from youth. in their business models (limited invest- Internet content, in line with the principles of freedom enshrined in the US Constitution: ment, few employees, high growth, global OTT PLAYERS AND THE CONQUEST footprint, etc.) but also in the rules applied // No blocking: Internet Service Providers OF AFRICA to them in terms of regulation and taxation. (ISPs) may not prohibit online access to So far, they have benefited from little or no content, applications or legal services, regulation, while telecom operators are for thus preventing censorship activity or OTT players are thriving in Africa, discrimination against specific sites or their part, highly regulated. Moreover, they driven by smartphone penetration services. are able to put in place international tax and the roll-out of 3G/4G networks. optimization strategies, given the variation // No throttling: ISPs cannot deliberately The development of international OTT offer different terms to sites or inten- in regimes applied by different countries in players in Africa remains lower than on tionally slow down (or speed up) the other continents. this regard. loading of their data. The objective: to prevent the introduction and develop- Nevertheless, states and regulators are For them, Africa is the major source of future ment of a two-tiered Internet. increasingly interested in OTT favorable growth; they are investing in the continent // No paid prioritization: It is now forbid- market conditions and are questioning the directly (Facebook and Netflix opened den for Internet service providers to advantages they enjoy: tax optimization, offices in South Africa in 2015) or in partner- charge a premium to sites that want dominant positions in certain markets, data to accelerate access to their content. ship with telecom operators: Vodacom with Since the Internet is seen as a “public Naspers (South Africa, 2015) and WhatsApp good”, the US ISPs Verizon and AT&T with Airtel (Nigeria, 2014). An imbalance of economic models are subject to transparency obligations with regard to Internet traffic mana- Whilst they target all African countries, THE TELECOMS INDUSTRY gement. Moreover, the FCC directly South Africa is the preferred point of entry • A heavily regulated sector manages user complaints. for OTT players because of its Anglo-Saxon • Subject to national tax regimes • Growth slowing down or limited In Europe, the European Parliament voted culture and higher level of maturity (deve- • A capital intensive industry on October 27th 2015 for legislation esta- loped telecom networks and a higher per- • Heavily reliant on labor blishing a principle of net neutrality similar capita GDP). • In transition toward IP • Traditional business models to that applied in the US. The European Parliament, however, allows certain excep-

OTT PLAYERS tions, which are considered to be favorable • • Limited or non-existent regulation for telecom operators. Practices known as • • International tax optimization Zero Rating would be allowed. These prac- • • Rapid growth tices consist of not counting toward overall • • Limited investment usage the data used on some specific web- • • Limited reliance on labor • • Based on IP sites. For example, a customer could have a • • Disruptive business models (free, package providing 1GB of data a month, at a freemium, etc.) price of €10, but would also have the right to

5 Communications OTT players OTTs are thriving in Africa, driven by smartphone penetration • 2go (South Africa, 2007), • Saya (Ghana, 2011), and the roll-out of 3G/4G networks • HowFar (Nigeria, 2014).

Audiovisual OTT players Tunesia

• Veesion TV (Namibia, 2014), Morocco • ShowMax (Naspers, South Africa, 2015), Algeria • FrontRow (MTN, South Africa, 2015), Western Libya Egypt • AfroStream, Sahara • Iroko (Nigeria, UK).

Mauretania Mali Niger International OTT players Senegal Sudan Eritrea Chad The Gambia Burkina Faso Djibouti Guinea Nigeria South Ethiopia Sierra Leone C.A.R. Sudan Cameroon Somalia Liberia Togo Uganda Ghana Kenya Ivory Coast Gabon D. R Congo R. Congo

Tanzania

African OTT players Angola Zambia Mozambique

Countries that have launched 4G Zimbabwe Madagascar

Namibia Botsuana Countries that are testing 4G or have launched it with limited coverage

Swaziland South Africa Countries using 2G/3G Lesotho

AFRICAN TELECOMS OPERATORS African mobile operators in 2015 compared Globally, VoIP from OTT players will repre- ARE PARTICULARLY IMPACTED with less than50% in Europe). sent 8.7 billion minutes and an estimated revenue of $63 billion in 2018. In Africa, There are very few unlimited package deals BY OTT PLAYERS DUE operators are therefore seeing their voice of the kind found in Europe; instead, the TO THE IMPORTANCE OF VOICE revenues heavily impacted while, at the same majority of services are priced by the minute REVENUE IN AFRICA time, they have to consent to heavy invest- or second. Against this backdrop, the “free” ments in licenses and 4G frequencies, as well offers of the OTT players are not only attrac- Current problems are essentially as network infrastructure (3G and 4G). tive to consumers but directly affect the voice-related. revenue of African operators. For example, OTT players threaten revenues from the in Morocco, SMS traffic has fallen nearly key mobile telephony services: SMS, roa- 25% year-on-year, reflecting the growth of ming, national and international voice i-messaging and instant messages on Viber calls. However, voice and SMS charges still or WhatsApp. accounted for about 90% of total revenue for

6 CHALLENGES AND IMPACTS CREATED BY «OVER-THE-TOP»

Penetration of high-speed mobile broadband

CAGR

OECD 3%

AFRICA

26%

* Compound Annual Growth Rate

THE DEVELOPMENT OF 3G/4G Marketing levers For example, blocking or limiting OTT ser- NETWORKS AND SMARTPHONES Being in direct relationship with the end cus- vices could be justified as a temporary mea- sure, until such time as telecoms operators WILL ACCELERATE THE ARRIVAL tomer, operators can exploit their marketing levers to adsorb the impact of OTTs on their are less dependent on voice traffic, but OF OTT PLAYERS IN AFRICA revenue. would have a long-term negative economic impact that should not be underestimated. The development of low-cost smartphones, // Offer generous voice packages. Ope- priced at less than $50, like the Orange Klif rators can offer generous voice pac- The positive impact of Internet services in or the Elikia (the first African smartphone, kages — “unlimited calls” — to reduce economic and social terms is unequivo- the price advantage of OTT players created by the Congolese manufacturer, cal: a 10% increase in access to data would on voice communications. These can VMK) will boost the use of OTT services result in an increase in global GDP of 1.35% be offered as prepaid packages, the in countries where 3G/4G networks are in method of payment almost exclusively (source: GSMA). From a social perspective, place. Between 2015 and 2020, the pene- applied in Africa. education and culture could benefit from tration levels of mobile broadband will the democratization of data, with produc- // Monetize the data. Operators must put experience exponential rise. Estimated as a price on data and educate the market tivity gains estimated at $30 to $70 billion. being 19% in Africa (and 81% in the OECD) in this direction because today it is data Regulators and governments should, there- in 2015, by 2020, these values are projected that carries costs for them, operators fore, explore other types of remedy, such as to reach 61% for Africa (compared with 93% and not voice communications. They tax incentives. can, at the same time, limit the use for Europe). of data (capping/shaping) to protect Investments in submarine cables over the against excessive usage, and encourage its consumption (tiering) via top-up past 10 years have connected Africa to the offers. These pricing strategies allow high-speed global broadband infrastructure. operators both to develop their data Here again, this development favors the revenues and avoid network saturation. development of OTT use in Africa. Investments in subma- REGULATORY SOLUTIONS WHAT ARE THE LEVERS rine cables over the past In Africa, regulators and governments can AND THE RESPONSES? implement supporting measures to help 10 years have connected telecoms operators manage their transition Operators have several strategic levers with to data, for example, by applying regulatory Africa to the high-speed which to address the challenges raised by measures. OTT players: marketing leverage with their global broadband clients, their ability to negotiate with the OTT companies, and regulatory levers applied by infrastructure public authorities and regulators.

7 However, African OTT players are also emer- momentum in developed countries and Adapting the regulatory ging, and they have been developing across could provide a model for Africa in the and tax frameworks the continent since 2010. They include: medium-term. // Supporting operators in the transition to data by adapting taxation PARTNERSHIP STRATEGIES IMPLICATIONS FOR GOVERNMENTS // Defining a common position among AND REGULATORS African countries on net neutrality Increasingly, OTT and telecom players are // Defining a common position on the jointly developing partnership strategies, The arrival of OTT players in Africa is inevi- taxation of OTT players such as Netflix Open Connect (Europe/USA) table and must be matched with supporting // Encouraging investment in Africa by or Google Open Flow Wan (Europe/USA), measures that further encourage investment international OTT players (content which allow telecom operators to connect in telecom networks. For this, several areas distribution networks, etc.) them directly to their infrastructure. must be investigated in more detail: Encouraging the emergence of Google and Netflix have invested in their own Encouraging the development of 4G African OTT players networks in order to offer a higher quality of infrastructure // Encouraging innovation, technology- customer service. This translates into colla- related training, and African startups / The granting of licenses and 4G boration with telecom operators, through / frequencies, taking into considera- // Creating favorable (legal and tax) the installation of OTT players’ equipment tion the new paradigm in the market conditions for financial investors in as close as possible to the local operators’ (price of licenses, coverage targets, Africa. networks. Facebook is implementing similar etc.) projects. // Facilitating infrastructure sharing on long-distance optical fiber infras- Some OTT players are willing to pay telecom tructure operators for access to a guaranteed quality // Promoting the sharing of infrastruc- of service (QoS). This is the case for Netflix, ture in sparsely populated areas which in 2014, agreed to pay Comcast to ensure an optimal quality of service for its // Facilitating access to international bandwidth customers.

This trend of cooperation between OTT players and telecom operators is gaining

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