OTT Communication Services vs. Rich Communication Services

We recently commented on the startling decline in SMS traffic due to WhatsApp.  WhatsApp and other Over the Top (OTT) communication services are not only impacting on SMS but also on voice usage.  The mobile operator community is fighting back with its Rich Communication Services (RCS) initiative. “For consumers, it will deliver an experience beyond voice and SMS by providing them with instant messaging or chat, live video sharing and file transfer across any device, on any network, with anyone in their mobile address book. RCS-e taps into how your consumers are already sharing their life moments with each other.” (source: RCS-e website).  This sounds familiar because this is what Skype, FaceTime, and WhatsApp are delivering today.

The key difference between RCS and OTT communication services is that with the former services are provided by the mobile operators each country and with the latter they are provided by a single cloud based service provider.  RCS fits into the traditional telecoms world in which mobile operators interconnect traffic. This is why it takes time to implement it across networks to become an equally universal service as voice and SMS today. Service universality is of course what made global telecoms so successful. But times change.

The cloud based approach is not only faster to market but a key advantage is precisely that the service is not linked to the access network or a particular device.  For example, a Skype video call can be made between a Smartphone user connected via HSPA and another using a laptop connected via ADSL. Such cross network / cross device “rich calls” are also possible with RCS Release 2, but compared to Skype it is non-existent.

While the RCE community is busy talking about roadmaps and inter-operability, millions have signed up to Skype and WhatsApp or use iPhone’s FaceTime. Mobile operator’s “rich services” such as MMS and mobile  video telephony have been around since the advent of 3G but failed to take off. And as regards universality, those who attempted international mobile video calls can attest to the low chances of success.  Nevertheless, mobile operators hold the relationship with the client, notably a billing relationship and RCE service may yet turn out to be adopted alongside OTT services.

Of course mobile operators could simply ride the OTT train and let people do what they want and charge them for the service they use, namely access and transporting bits.  RCS is designed to prevent mobile operators being relegated to a mere bit pipe. However, transporting bits is where most of the investment goes. Billion are being spent of building HSPA and LTE networks and acquiring spectrum, yet data transport is often priced at a low level or an add-on to a voice centric mobile phone tariff plan.  And even worse: As we see in  the Q4 2011 earnings releases from Verizon, AT&T and Sprint with profits and cash flow being hammered by iPhone subsidies. By subsidising Smartphones, mobile operators in effect subsidise OTT service providers.

Perhaps the answer is to change the mobile operator business model. Mobile operators have in effect opened their network to competition at service level to OTT service interlopers.  In an open market, if pricing does not relate to cost, interlopers will attack where pricing is well above costs. International call pricing is a good example.

OTT service providers such as Skype and WhatsApp are global in scale. Therefore, as regards the cost of providing services (excluding access), OTT service providers have a huge cost advantage compared to mobile operators. The other issue is time to market.  New services are easily and rapidly implemented in a cloud. The operator / interconnect model cannot match this agility. This matters because we do not even know what services might be around the corner.

There is of course one huge issue.  Telecoms operators are tightly regulated from a telecoms regulatory and competition perspective. One key regulatory objective is to promote competitive markets and consumer choice. Interconnect regulation, with its requirement to interconnect on non-discriminatory basis, is a cornerstone of this. However, these rules do not apply OTT providers. For example, other operators cannot “interconnect” with Skype in the sense that they cannot provide their own Skype like software client to their customers which would have the same functionality as Skype itself: see who is online, access to the only address book, video conferencing, screen sharing, etc.

Instead what we are seeing is regulatory asymmetry, in as much as the principle of net neutrality is high on the regulatory agenda and this means that mobile operators cannot block or charge more traffic to OTT service providers. However, the reverse is not true.  While there has been some discussion around NGN interconnect and APIs, perhaps regulators are not yet worried about the implications for monopolistic behaviour of OTT service providers because other services such as Apple’s FaceTime provide an alternative. However, the issue may well become the regulatory challenge of the future.  And challenging it would be, because national regulatory agencies (NRAs) may find it difficult to regulate a cloud service like Skype or WhatsApp.

Written by Stefan Zehle, CEO, Coleago Consulting

What is wrong with being a bit pipe?

As the telecom world (both fixed and mobile) moves increasingly towards data there has been a lot of debate about whether it is a good or bad thing that infrastructure based telecom operators are becoming bit pipes.  The conventional view in the industry is that becoming a bit pipe is a bad thing and that telecoms companies will miss out on being able to provide lucrative new services to customers due to the emergence of OTT services which run over their bit pipes and are not controlled by the telco.  We would argue that this viewpoint, although understandable, is flawed and operators need to focus on the positive side of their situation by aiming, for example, to become the most profitable branded bit pipe provider in their market rather than expending scarce resources on trying to create new revenue streams that in all likelihood will not materialise.

The telco view of OTT is not entirely logical: If the definition of an OTT service is one that is delivered directly from the provider to the end customer using an open internet/broadband connection i.e. independently of the telco, then OTT services would logically cover all goods or services provided online. So not only would Skype and App stores be OTT services, but so would e-commerce sites such as Amazon or e-Bay as well as search services such as Google not to mention social networking sites like Facebook or Twitter. The whole point of the Internet is that it is open and this encourages innovation, which militates against the notion of any form of central control.

Telcos may not have the skills to launch many OTT services: In many instances telecom operators have no real competence in running OTT services as is evidenced by the fact that with very few exceptions they have failed to launch many successful OTT services. We struggled to think of many telcos that have been successful in this field.  One of the few examples we could think of was Safaricom in Kenya, which pioneered (a GSM based) mobile payment (banking) service called M-PESA. NTT DoCoMo’s i-mode service in Japan has been cited in the past but even it is an open platform and third party OTT service providers can have direct relationships with end customers.

Having a billing relationship with a customer is less of an advantage now: In the past a telco’s billing relationships with its customers was seen as a source of advantage but given the growth of online commerce many organisations (look at Paypal or Amazon or Skype) now have direct billing relationships with customers and this advantage has clearly been blunted.

OTT services increase demand for bit pipes: OTT services provided by third parties drive demand for more and better broadband connections i.e. the fundamental services provided by telcos. So the good news is that demand for telecom operator services is set to grow even if in the near term there are pressures as traditional voice and SMS revenues are in decline. Telecom operators in aggregate enjoy higher returns on capital than many other types of businesses and this combined with the utility nature of the business ought to make being a successful branded bit pipe provider an attractive business proposition. Telcos that can successfully develop and market the right mix of tailored bit pipes with the right cost structure ought to have bright future.

Written by Scott McKenzie, Director, Coleago Consulting

WhatsApp replaces SMS: 12% year-on-year decline of SMS traffic in Taiwan

During a visit to meet Taiwanese mobile operators in the context of forthcoming spectrum licence renewal, we found that mobile operators in Taiwan experienced a sharp decline of SMS traffic as users switched to WhatsApp for messaging, resulting in a  decline in SMS traffic of around 12% year-on-year. While other operators have reported that IP based forms of messaging impact SMS traffic (e.g. KPN Q1 2011, reduced Christmas SMS traffic in Finland and Hong Kong) the development from Taiwan is particularly stark. It is not often that demand of a telecoms service declines by 12% in a single year.

From an operator’s perspective the question is whether this good or bad news. In developed markets most operators sell large SMS bundles which often are not used up. The marginal revenue from SMS is likely to be near zero and therefore the reduction in SMS may not affect revenue materially. WhatsApp is a much richer form of messaging and therefore of value to consumers. This makes the mobile phone service more valuable to users and further drives smartphone adoption.

For the Taiwanese operators the good news was that the 2012 New Year SMS traffic peak was much lower this year than last year while making more efficient use of network resources which brings cost benefits. This is a fine example that with new technology potentially everyone is a winner. The same pattern is likely to be repeated for the Chinese New Year on the 23^rd of January 2012.

Of course the development is unlikely to increase AVPU and the messaging service is no longer provided by the mobile operator who only transmits the IP traffic. This is further evidence that transmission rather than services is becoming more important for mobile operators, i.e. they start to look more like bit pipes.  From the mobile industry perspective often this is viewed negatively, but at the mature stage of the industry life cycle a focus on transmission may increase return on capital employed for mobile operators. After all, services such as WhatsApp are global in scale whereas operator’s services, while allowing for cross network traffic, are not.  But as services become more valuable to consumers, so does the capability to transmit the services.

Mobile operators are of course really good at transmission and they have a billing relationship with their clients which could be leveraged to bill of all the new IP based services on behalf of the service providers. Taking the 30% margin on Apple’s AppStore as an indication this could be good business considering that there is no capex associated with this other that perhaps a little billing system upgrade.

Of course we have seen telecoms services declining before i.e. fax and even becoming extinct e.g. telex.  In some markets, including the USA, SMS traffic is still growing, but perhaps soon SMS will join telex and fax in the telecoms museum.

Written by Stefan Zehle, CEO, Coleago Consulting

Spectrum sparks interest of mass media

With many countries worldwide moving from analogue terrestrial TV to digital terrestrial TV, the conversation has turned to what the defunct spectrum from the analogue terrestrial TV will be used for. TV is of course the mass media par excellence and hence the mass media are starting to speak about spectrum related issues, notably the digital dividend spectrum (700-800MHz) and mobile broadband.

Whilst this is something the industry has been working on for a number of years, it is now becoming of interest at a consumer level as individuals want to know how the digital switchover may affect the mobile services they receive. We spoke with the BBC Click team last week. To see their take on the digital switchover and spectrum please click here. This interest at consumer level is an excellent opportunity for mobile operators, device manufacturers, cloud service providers, software firms and other industry players to position themselves in the public imagination.

Written by Stefan Zehle, CEO, Coleago Consulting

From One to 3 in Austria: Will Hutchison be a consolidator in Europe?

Rumours that Hutchison Whampoa’s 3 Austria is close to sealing a deal to acquire Orange Austria (previously One before being rebranded) for €1.4bn may be good news for the Austrian mobile sector which has seen fierce competition as four operators battled it out in a country of eight million people. It is estimated that in service revenue terms Hutchison has about 6% of the Austrian mobile market while Orange has about 19%. By comparison, Telekom Austria has 44% and T-Mobile has 31 % so the merged entity will still be smaller than its larger competitors.  Although the price seems quite steep at circa 7x EBITDA it may well be justified if 3 Austria can extract hundreds of millions of synergies from the deal by rationalising the networks and avoiding damaging price and subscriber acquisition wars. Post-merger execution will needless to say be critical.

The two other operators in the market (Telekom Austria and T-Mobile) will also benefit and no doubt they will be hoping that the deal is approved by the competition authorities. This might explain, if the press reports are true, why Telekom Austria is so keen to help 3 Austria do the deal by, for example, buying Orange’s discount mobile brand Yesss! as well as some 2.1GHz spectrum and 3,000 redundant base stations. Press reports suggest that 3 Austria will raise up to €300m from these divestments which will lower the overall transaction risk.

In the coming years we expect further mobile network operator consolidation in developed markets as the industry becomes increasingly mature and margins come under further pressure. For Hutchison Whampoa, this represents a new wave of investment in Austria and its 3G business and we wonder if it is not a template to be used in other markets where it is finding the going tough.

Written by Scott McKenzie, Director, Coleago Consulting

Overcoming Objections to AT&T’s Acquisition of T-Mobile USA

AT&T’s announcement last week of a $4bn charge in respect of the $39bn take-over of T-Mobile USA indicates a high likelihood that the transaction will not go ahead. This is not necessarily good news for US consumers and shareholders.

Telecoms markets in developed countries are maturing and in some markets revenues are already declining. At this stage of the industry life cycle consolidation would be expected. If there is no further revenue growth the only way in which returns can be maintained without increasing prices is by taking costs out of a business. This is likely to have been the principal driver behind the proposed acquisition.

Much of the opposition to the merger is on grounds of the negative impact on competition at retail level. A solution could be for AT&T to acquire T-Mobile’s network assets but not the rest of its operation, effectively turning T-Mobile into an MVNO. After all, much of the passive infrastructure is probably already owned by tower companies who lease tower space to several mobile operators. Traditionally a very high proportion of a mobile operator’s assets were in the non-active infrastructure – it typically accounted for two thirds of the capital cost of a cell site. The next step would be to share the active RAN and even the whole network. If T-Mobile USA continues to operate as an MVNO this would not affect competition at retail level.

In persuading the US Department of Justice and the FCC to drop their objections to the deal, AT&T might consider introducing accounting separation between its mobile network operating business and its retail business. AT&T’s retail business would buy capacity from the network operating company at the same terms as T-Mobile USA.

The net effect may be positive for all stakeholders:

• One merged network will have lower operating costs than two networks, i.e. costs are taken out of the industry. This benefit is likely to be shared between consumers in the form of lower prices and shareholders.

• Although some spectrum may have to be divested, the merging of AT&T’s and T-Mobile’s spectrum assets would make it easier to refarm spectrum to LTE and deploy wide carriers earlier. This means existing spectrum will be used more efficiently in terms of bits per Hertz. With the growth of mobile broadband this yields an economic and societal benefit, as is well documented.

• There will be a number of further spectrum auctions. With one operator less bidding for spectrum, demand at auction is reduced and prices paid for spectrum are likely to be lower. This will benefit all players in the market.

Written by Stefan Zehle, CEO, Coleago Consulting

How Nokia hopes the new Lumia will light up Asia

The launch of the latest Nokia Lumia smartphones could revive Nokia’s presence across Asia and China in particular, but will they come quickly enough? Both the Lumia 710 and 800 Windows phones are scheduled to be available in Hong Kong, Taiwan, Singapore and India before the end of 2011, and Nokia will no doubt be working hard to avoid the delays which plagued the launch of too many previous models. However, China will have to wait until “the first half of 2012″ before it sees the much-admired fruits of Nokia’s partnership with Microsoft. In the meantime it seems likely that “unofficial” supplies could filter across to the mainland, which may help to sustain interest until the official launch, although only China Unicom’s network is compatible with the 3G technology currently used in these Lumia models.

It could be down to the diverse 3G standards used by China’s three mobile operators: W-CDMA (the technology used most widely throughout the world) is deployed by China Unicom, CDMA2000 (less widely used, but most notably in North America) is deployed by China Telecom and TD-SCDMA (a standard developed in and currently limited to China) is used by the largest operator, China Mobile. Back in August Colin Giles, Global Head of Sales at Nokia, and formerly Director of Marketing for Asia Pacific and Senior Vice President for Greater China, announced that Nokia will be launching TD-SCDMA compatible Windows Phone 7 handsets in China. So it seems likely the delay is to allow Nokia time to engineer versions of the Lumia phones which can operate on the CDMA2000 and TD-SCDMA standards, allowing Nokia to launch its new smartphones with all three of China’s mobile operators.

With Nokia struggling to maintain its market position in Asia and across the world, clearly an earlier launch in China would have been preferable. However, this strategy does give Nokia one potential advantage against the iPhone: Apple doesn’t have a TD-SCDMA version either and it looks unlikely it ever will. That hasn’t stopped China Mobile from selling the iPhone through a network of partners, acquiring around 10 million iPhone users so far. The iPhone can use China Mobile’s 2.5G network for voice calls and text messaging, but users are limited to wifi for high speed data services. To promote this growth in high value customers, China Mobile is offering rebates in the form of gift cards to customers who buy an iPhone through one of its partners and sign up to a 2g voice and wifi package. In an increasingly competitive market, this “subsidy” is unlikely to be an attractive long term solution for the operator to retain high value customers, and it’s not a good solution for customers who want to use their apps wherever they go. However, many customers prefer these limitations to the unreliable coverage of Apple’s official iPhone partner, China Unicom (although the operator is now working hard to improve its service). So if Nokia is able to offer versions of the Lumia smartphones that work on the 3G network of China’s largest operator, China Mobile, that could be a win-win for both Nokia and the operator. Nokia has been building TD-SCDMA feature phones for several years, so it has the expertise to solve the hardware problems. Hopefully its close relationship with Microsoft will ensure a smooth integration of these radios with the Windows software as well. Once again though, timing is critical: 2012 sees the end of Apple’s exclusive 3-year deal with China Unicom and is also likely to see the launch of the iPhone 5, which just might support the 4G technology (TD-LTE) that China Mobile is currently building, although recent reports suggest that Apple and China Mobile have failed to agree a deal, as the operator wants a cut of Apple’s app revenues as well. So Nokia needs to exploit this opportunity quickly whilst also lining up its 4G Windows Mobile phones for the next round in the battle. And that means also pushing Microsoft for better 4G LTE support in the Windows Phone 7 operating system.

And what of the other major competitor in Nokia’s smartphone war, Android? Nokia is being squeezed on all sides here, from both lower cost local brand phones and huge global players like Samsung and HTC. With Android smartphones available for as little as 1,000 Yuan (around USD160) in China, it seems likely the cheapest Lumia model will come in at around twice that price. However both Microsoft and Nokia expect that cost to fall as cheaper and more powerful processing chipsets and cheap WVGA (typically 800 x 480) screens reduce the cost of a phone capable of supporting the complexity and power of Windows Phone 7. Add to that Nokia’s excellence in hardware engineering and phone design, and the relatively straightforward integration of Windows Phone 7 with the Windows desktop which is particularly prevalent across Asia, and Nokia may be in with a chance of arresting its recent steep decline in the smartphone sector. These new Windows phones could do particularly well with customers who have yet to make the jump to a smartphone (ie they don’t already have an investment in apps, loyalty and learning how to use a particular smartphone OS effectively). Our guess is that Nokia is hoping the Chinese market for these premium smartphone products won’t accelerate too quickly, leaving it behind.

Written by Robert Filkins, Managing Consultant, Coleago Consulting

Vive la différence II

The French telecoms regulator announced at the end of last week that they have finished the 2.6GHz auction process begun in June.

	FDD Allocation (MHz total)	Price (m€)	€/MHz/POP	Obligatory MVNO access
Orance	40	287	0.110	Y
SFR	30	150	0.077	N
Bouygues	30	228	0.116	Y
Free Mobile	40	271	0.104	Y
TOTAL	140	936	0.102

The format used in France was a first price single round sealed bid which meant there was no opportunity to learn and can lead to disparities in prices paid. As if to illustrate this point, one player (SFR) got the spectrum at the reserve and did not need to commit to hosting MVNOs.Although the price per MHz per pop does not look outrageous compared to some other 2.6 GHz auctions (e.g. Denmark and Sweden for example), it is 4.5x that seen in Germany in 2010 and this might be (partially) explained by the fact that the reserve price level set in France was a lot higher than that in Germany – 25x on a per MHz POP basis.

The 800MHz digital dividend spectrum is now to be launched before year end.

Written by Scott McKenzie, Director, Coleago Consulting

The risks with Google Wallet

Interest in the industry regarding NFC and mobile payments is continuing to grow following the joint venture by Orange, Vodafone, O2 and T-Mobile, with the Google Wallet emerging as the latest major breakthrough. It will aide NFC to continue to take off (albeit slowly at first) and it is our expectation that we will see NFC technology be built into a growing number of new mobiles, including the iPhone 5. But uptake will still be slow over the next 18 months to two years. However, NFC chip makers are forecasting that 40 to 50 million NFC-enabled phones will be in circulation by the end of 2011, so early adopters are likely to be investing in a new handset pretty soon.

Making money out of mobile payments was one of the drivers that drove the share prices of telecoms companies to stratospheric levels during the Dot Com boom. Ten years on and the Google Wallet is the only real  progress that has been made in relation to m-payments outside of some mobile banking applications for developing markets and the UK operator joint venture earlier this year, of which we’re still waiting to see the results. One of the reasons for the lack of progress is that m-payment is a classic example of network economics. The more customers and the more sellers who adopt an m-payment platform, the more valuable that platform becomes. The GSM mobile standard was a perfect example of network effects in action and the lack of global or even national coordination for an m-payment standard is a contributing factor to the lack of success to date.

Google seeking to establish a dominant standard is a risky business. If it gets it right, like Microsoft, it can look forward to significant returns. If it gets it wrong, like Betamax video and more recently HD DVD, it can expect some difficult questions from shareholders. A number of players in the last 10 years have sought to establish a payment standard but none have been successful and their attempts have been somewhat half hearted.

Written by Graham Friend, Managing Director, Coleago Consulting

Wireless Industry Consolidation in the USA: AT&T’s blocked acquisition of T-Mobile

The troubles of T-Mobile go back many years and are related to inferior spectrum holdings: “We were late with 3G”, said Neville Ray, SVP, engineering and operations T-Mobile USA, in March 2009. Since then T-Mobile acquired spectrum in several auctions and launched 3G, but it still has an inferior spectrum position. Spectrum auctions, beloved by the FCC, often cause reduced competition in wireless markets because the business case for spectrum auctions always looks better for larger operators. One of the largest components in deciding how much to bid for spectrum is the value arising from denying spectrum to rivals. If the US government had wanted more competition at network level it could have chosen a method of spectrum allocation other than unfettered auctions.

However, developments in the wireless industry have moved the goalposts and sooner or later the Justice Department will have to relent on its opposition to the proposed acquisition.  In developed wireless markets there is now very little growth in the wireless industry revenue, i.e. the industry is mature.  At this point of the industry life cycle management focus shifts from seeking revenue growth to taking out costs, for example through consolidation.

The physical network is increasingly a commodity, whereas there is increasingly fierce competition at retail level. In many markets consolidation at network level went hand in hand with increased competition at retail level with the launch of multiple Mobile Virtual Network Operators (MVNOs) and branded resellers. If the Justice Department and the FCC are concerned with competition they could make approval conditional on incorporating provisions into the acquisition that make it easier for MVNOs to enter the US market. Having said that, T-Mobile’s case is not helped by the smoking gun in T-Mobile’s past: In October 2009 Deutsche Telekom’s CFO Timotheus Hoettges insisted there was no need for further consolidation of the US wireless market: “There are four national players in the US market for 300 million households, while in Europe, where we have 350 million households, there are 50-70 operators.”

Written by Stefan Zehle, CEO, Coleago Consulting