Over-the-Top Communications : Threats & Opportunities for Mobile Operators SECTOR REPORT Over-the-Top Communications: Threats & Opportunities for Mobile Operators October 2012 Chris White Lead Analyst Matt Lewis Research Director ARCchart 78 York Street London W1H 1DP United Kingdom Tel: +44 33 00 88 1355 Fax: +44 33 00 88 1350 [email protected] ARCchart is an independent research and consulting firm focusing on all aspects of the wireless communications sector. Based in London, ARCchart’s depth and breadth of analysis provides a global perspective on wireless technology and industry developments. Combining original thinking with exceptional knowledge and experience, ARCchart assists clients in making sound commercial decisions about technologies, market strategies and competitive positions. ARCchart’s strategic advice covers all aspects of the wireless value-chain - ranging from semiconductors and WLANs to network operators, handsets and mobile applications. This report draws upon research and analysis conducted by all the ARCchart information groups. Use of this report by any third party for whatever purpose should not, and does not, absolve such third party from using due diligence in verifying the report’s contents. Any use which a third party makes of this document, or any reliance on it, or decisions to be made based on it, are the responsibility of such third party. ARCchart, its affiliates and representatives accept no duty of care or liability of any kind whatsoever to any such third party, and no responsibility for damages, if any, suffered by any third party as a result of decisions made, or not made, or actions taken, or not taken, based on this document. ARCchart does not make investment recommendations, in this report or otherwise, and nothing in this report should be interpreted as an opinion by ARCchart either on market forecasts or on the prospects of specific companies. Over-the-Top Communications: Threats & Opportunities for Mobile Operators Executive Summary Over-the-top (OTT) communications represents the largest threat to mobile operator revenues in the last 10 years. Prominent examples of OTT services, like Skype and WhatsApp, have had a direct impact on the mobile industry’s profitability and are placing pressure on operators at a time when they are compelled to build expensive new 4G networks. Today, VoIP is capturing an increasing proportion of mobile voice minutes, but in terms of value it is still worth less than 0.5% of overall voice revenues. With regards to messaging, ARCchart expects that instant messages will exceed SMS volumes by 2014 and continue growing rapidly thereafter, accounting for 65% of all message traffic pushed over mobile networks by 2016. This report examines the implications of widespread adoption of mobile over-the-top IP communications for mobile operators, handset vendors, and the OTT providers themselves, looking at how OTT players have gained a foothold at the expense of the mobile network operators and analysing how the various ecosystem stakeholders are dealing with the new industry dynamics. The report sizes the OTT market both in terms of revenue and users, and forecasts growth in relation to traditional circuit-switched voice and text messaging. In many ways, the seeds of success for the OTT providers were sewn by the mobile operators themselves who offered flat rate data plans to encourage consumption of 3G data, and who opened their network APIs in an effort to fill the pipes. This research presents case studies showing how operator voice and SMS revenues – which still equate to 80% of total revenues – have been eroded through revenue leakage to third parties. A major driver for OTT services has been the ever-increasing penetration of smartphones. Growth of iOS and Android devices and their respective ecosystems have acted as a fertile breeding ground for many of the nascent OTT services currently in play. Global smartphone penetration is expected to be 51% of total handset sales by the end of 2016, up from an estimated 31% in 2012. The report examines how operators have responded to the OTT challenge, from early attempts to block OTT service from running through the network, to offering large bundles of SMS and voice minutes at attractive prices in order to compete with VoIP and IM. Some operators have looked to partner with the OTT providers as a way of differentiating themselves – a strategy that has proved successful with new entrants. i Over-the-Top Communications: Threats & Opportunities for Mobile Operators The strategies which mobile operators can leverage in order to fight back against the rise of OTT services are a central aspect of this research, and the GSM Association’s Rich Communications Suite (RCS) represents a key part of this defence. RCS-e exploits a number of the Achilles heels of the OTT community, including a general lack of interoperability. Skype – the largest of the OTT providers - has largely been protective of its user base and has prevented interoperability between other platforms. A lack of a strong business model is also weighing heavy on some OTT providers who have yet to monetise their offerings. RCS-e neatly combines interoperability through existing telecoms infrastructure and a billing relationship with the end-user. Although RCS-e has been fraught with problems in its introduction, ARCchart anticipates a strong uptake of RCS-e, with around 35% of mobile VoIP users going through an RCS-e solution by 2016 and 19% of mobile IM users choosing RCS-e. Nonetheless, several mobile OTT communications providers have critical mass and the evidence shows that even when SMS and voice are priced comparatively cheaper than IM and VoIP, many customers continue to use their OTT solutions because of the richer experience. To win back these customers operators will need to offer a compelling mix of quality products that are competitively priced and built with interoperability and ease-of-use in mind. Selected companies within the over-the-top sector are profiled along with a discussion of how their business models are evolving. The report assesses how regulations could impact the market and how the prospects of a ‘Google tax’, or some form of tax on data usage, could turn business models on their head. ii Over-the-Top Communications: Threats & Opportunities for Mobile Operators Table of Contents A. INTRODUCTION ...................................................................................... 1 A.1 | History of Over-the-Top ........................................................................................................ 2 | Historical OTT Example ....................................................................................................... 2 Microsoft versus IBM ....................................................................................................... 2 | Contemporary OTT Examples ............................................................................................. 2 Skype ................................................................................................................................ 2 Apple’s Siri ........................................................................................................................ 3 Facebook .......................................................................................................................... 3 A.2 | The Threat to Traditional Communications .......................................................................... 3 | Operator Revenues at Risk ................................................................................................. 4 A.3 | Operators Fighting Back ........................................................................................................ 5 | Attempts to Limit OTT Access ............................................................................................. 5 | Operator Advantages over OTT .......................................................................................... 6 A.4 | Report Overview ................................................................................................................... 6 B. MARKET OVERVIEW ............................................................................... 7 B.1 | The Evolving Mobile OTT Landscape ..................................................................................... 7 | The Flow of Value Between Internet Companies and Cellcos ............................................ 7 | Risks to the OTT Business Model ........................................................................................ 8 Transitioning from Free to Paid........................................................................................ 8 User Consolidation of Services ......................................................................................... 8 Support for RCS ................................................................................................................ 8 B.2 | Data Revenue Not Compensating for Lost Voice and SMS ................................................... 9 | Regional Examples .............................................................................................................. 9 UK ..................................................................................................................................... 9 iii Over-the-Top Communications: Threats & Opportunities for Mobile Operators Netherlands .....................................................................................................................