Whitepaper: OTT Services blow up the Mobile Universe

OTT Services Blow Up the Mobile Universe. Operators Must Act NOW!

A whitepaper by Sponsored by

September 2013

METHODOLOGY

Research was conducted by mobilesquared during May and

June 2013. The project involved a multi-layered approach

based on direct and indirect research.

Direct research involved two elements. Firstly, the mobile

operator research used an online survey of agreed questions

between mobilesquared and tyntec. The survey was pushed

out to mobilesquared’s global mobile operator database.

The first wave of mobile operator research was conducted in

3Q2011 and repeated in 2Q2012.

Secondly, primary research based on 1-2-1 interviews with

mobile operators and OTT service providers and vendors,

extensive research and interviews at key industry events, such

as the Global Messaging Congress in London and LTE World

Congress in Amsterdam in June 2013. And indirect research,

i.e. secondary and tertiary research (primarily online based).

Forecasts for this whitepaper have been constructed using a

6-step process.

1. mobilesquared forecasts are based on subscriptions, and

not subscribers, which factor in consumers owning more than

one smartphone device. This has been applied to 68 markets

(See Page 9).

2. The research then involved updating smartphone

penetration as a percentage of subscriptions per market.

3. The next step was to identify OTT communication user

penetration as a percentage of the smartphone user base in

each market.

4. Key data points were extracted from the direct and indirect

research to identify OTT communication users and usage

trends for voice from providers such as Skype and Viber,

such as percentage of “OTT off-net communication” mobile

calls compared to Skype-to-Skype calls for example. These

key data points provide key data reference points for the data

modelling. Other OTT communications provider data has been

included in the modelling where applicable. Repeat OTT

communications user and usage trends for messaging, using

data from services such as WhatsApp.

5. Termination rates from the mobile operator research were

applied to traffic projections to create revenue forecasts.

a. OTT communication revenue forecasts are based on a

variable rate for OTT off-net communication, ranging from

$0.015, $0.025, $0.035, and a universal rate of $0.06 for

OTT-to-mobile calls, and a flat-rate of $0.01 for all OTT

off-net communication SMS traffic. These termination

rates are based on actual numbers acquired during the

research process.

The mobile forecasts included in this report focus only on the

global mobile operator opportunity from traffic generated from

an OTT communication service provider to a fixed or mobile

phone using a traditional phone number. For the purposes of

this report we call a Skype call to a mobile phone, for example,

an “OTT off-net communication” call. Therefore, the forecasts

in this report only cover the traffic and revenues generated by

the termination of “OTT off-net communication”

communications (voice and messaging). The forecasts do not

look at the total OTT communication opportunity, such as the

revenues generated from WhatsApp downloads or projected

subscription costs, for example. Neither do the forecasts

include OTT music or OTT TV.

METHODOLOGY | PAGE 2

Table of contents

METHODOLOGY & INTRODUCTION 2 - 4

EXECUTIVE SUMMARY 5 - 8

AN OVER-THE-TOP UPDATE 9 - 21

FORECASTS 22

KEY MARKET DATA 23 - 25

PAGE 3 | TABLE OF CONTENTS

INTRODUCTION

INTRODUCTION | PAGE 4

This whitepaper follows on from a similar research project conducted in 2012 by mobilesquared entitled: OTT Services: How Operators Can Overcome the Fragmentation of Communication.

In the last 12 months mobile operators have now acknowledged that over the top (OTT) communication services have become the greatest threat to their revenues, replacing the previous incumbent of churn. This whitepaper will focus on where OTT communication (voice and messaging) is today, the potential threat of the major players, and how mobile operators can limit the impact OTT services will have on their revenues.

mobilesquared’s latest research reveals that in the last 12 months the adoption and usage of OTT communication has accelerated considerably, more mobile operators are looking to partner with OTT players as they look to minimise their decline in messaging revenues, and offset their lack of service innovation.

http://www.tyntec.com/resources/whitepapers/wp-how-operators-can-overcome-the-fragmentation-of-communication-long-version.html


Over the last 12 months, there has been a considerable acceleration of OTT user growth and usage. With smartphones to reach 1.6 billion by the end of 2013 and 3.1 billion by 2017, the number of smartphone users using OTT communication services will be 925.5 million this year, and 2.1 billion by the end of 2017.

The mobile operator survey reveals that they are clearly expecting a new wave of OTT users adopting the services in 2014, most likely based on what they have witnessed over the previous 12 months. The mobile operators also identified a maturing of existing users, with over one-fifth of operators expecting more than 50% of their subscribers to be using OTT.

THE RISE OF OTT SERVICESThe research shows that 43% of mobile operators view Skype as a major threat to their revenues. Skype now has 280 million active monthly users spending a total of 2 billion minutes per day on Skype, equating to 730 billion minutes a year. On average, each of these active users spends just over 7 minutes per day, or 2,555 minutes a year using Skype communication services. Skype is costing the telco industry $100 million per day and a staggering $36.5 billion per year.

Mobile operators believe Google+ Hangouts will be more popular than Facebook Home, though they view WhatsApp as the clear leader of the OTT market.

WhatsApp now has 300 million users, growing at a rate of 14.6 million new users per month. That represents user growth of 233% in 12 months, during which daily messages sent has increased from 2

billion to 10 billion. Beyond WhatsApp, there are more messaging and chat apps achieving scale. KakaoTalk in South Korea have over 80 million users, Line launched in Japan now has over 140 million users globally, and WeChat from China now has over 400 million users around the world. WeChat is the fastest growing OTT app. In 2012, WeChat doubled its user base from 100 million to 200 million in 6 months, and it had doubled its user base once more by June 2013. There are of course other players with millions of users such as Nimbuzz, Pinger, HIKE and eBuddy all to consider.

HOW OPERATORS PLAN TO TACKLE THE THREAT OF OTTThe survey reveals that the majority of mobile operators now have an OTT plan or strategy in place. With fewer mobile operators imposing surcharges, blocking OTT, and the reduction in offering their own OTT client, indicates mobile operators are becoming more tolerant and accepting of OTT players. As a result 36% are partnering with OTT providers in 2013, up from 32% in 2012.

WhatsApp now has 300 million users, growing at a rate of 14.6 million news users per month.

According to the research, the number of mobile operators generating revenues from OTT services by charging for data is falling year-on-year. In 2013, this figure was one-fifth, down from 26% the previous year, and 50% in 2011. The results to this survey question reveal something of an anomaly, given the rise in data traffic and revenues, and would suggest

PAGE 5 | EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

OPERATOR OPINIONS ON JOYNThe collective mobile operator response to the threat of OTT to generate revenues and leverage their infrastructure is Joyn, a default communication ecosystem. Joyn is one example of mobile operators emulating OTT communication services, and will offer chat, share files over a running voice call, and incorporate the user’s location.

The mobilesquared research shows that only one-third of mobile operators have a positive stance towards Joyn – of these mobile operators, the majority believe it has taken too long to launch. Of the remaining two-thirds of mobile operators, 29% believe Joyn is not the solution, with a further 35% uncertain of the impact Joyn will have on their positioning to tackle OTT services.

29% believe Joyn is not the solution. Additional qualitative research by mobilesquared confirmed the uncertainty of Joyn as the mobile operator answer to challenge OTT. The time to commercially launch the service, coupled with the need to interconnect every mobile operator, has clearly cast doubt over the service. Given that much of the appeal of OTT services is their international connectivity, interconnectivity will be a critical feature for Joyn.

EXECUTIVE SUMMARY | PAGE 6

mobile operators were ideally placed to exploit the rise of OTT usage.

36% of mobile operators are partnering with OTT providers in

2013, up from 32% in 2012. One possible explanation for this somewhat unexpected response could be that access to OTT communication services is now being bundled by the mobile operator as part of their simplified post-paid offering. And if so, this implies that the majority of mobile operators are adopting a dumb pricing model and not offering innovative OTT communication data plans.

Alternatively, the need to offer their own client could be diminishing as the number of mobile operators deploys IMS/LTE to offer RCS/RCS-e. Interestingly, this number has dropped from 47% in 2012 to 29% in 2013. This is either because the mobile operator has now implemented an IMS core, or has delayed their investment.

The most popular tactic now being employed by mobile operators is to launch next-generation SMS and MMS service, as their own OTT services are facing increasing internal pressure. mobilesquared research reveals that the future of Tu Me is in doubt because of lower-than-anticipated uptake and usage. Telefonica is in the process of reviewing whether to discontinue the service.

PROTECTING VOICE AND MESSAGING REVENUESBut mobile operators must act now, as the impact of OTT communication is starting to chip away at their messaging revenues. Between 2011 and 2013, the research shows that the number of mobile operators stating that they had not experienced a drop in messaging revenues as a direct result of OTT clients on smartphones has almost halved from 62% to 36%.

Over 56% of mobile operators said that messaging was in decline.

In total, over 56% of mobile operators said that messaging was in decline, of which almost half of were experiencing an overall decline in messaging traffic of up to 5%, and one-third of those mobile operators experiencing a decline of between 6-20%. For the first time in the mobilesquared annual OTT research process, 14% of mobile operators are claiming that OTT has created a loss of messaging revenue of more than 21%. Of those mobile operators that are experiencing an increase in messaging traffic, 29% claim overall messaging traffic is up by between 1-5%, 43% of those mobile operators cited a 1-5% increase in SMS traffic, while 14% said they experienced an increase of 6-10%, and an additional 14% of mobile operators said SMS traffic had grown by over 11%.

Mobile operators can potentially offset this decline in revenues by tapping into the OTT opportunity. The subsequent impact of more OTT users presents a marked increase in OTT off-net termination for mobile operators, especially given the proliferation of OTT services. mobilesquared forecasts that the global telco opportunity for OTT off-net termination will be worth $53.7 billion in 2017, a substantial increase from the $7.9 billion revenues in 2013. In 2013, the termination of OTT off-net communication fixed-line traffic represents the greatest revenue generator for telcos, worth $4.2 billion in 2013 rising to $20.3 billion in 2017. But over the forecast period, that figure will be overtaken by OTT off-net communication mobile traffic termination revenues, generating $2.2 billion in 2013 and leaping to $23.7 billion in 2017. SMS termination will account for $1.4 billion in 2013, increasing to $10 billion in 2017.

Operators can potentially offset this decline in revenues by

tapping into the OTT opportunity.”

The Top 5 smartphone-based OTT markets, led by China and followed by the US, Brazil, India and Germany, cumulatively total 624.1 million users in 2013, and account for 67% of the total global user base. Admittedly, China makes up a substantial proportion of that figure with 445.9 million. By 2017, the Top 5 markets will total 1.3 billion users, though their contribution to total global users would have fallen to 62% as other markets make minor inroads on the leading five’s dominance.

EXECUTIVE SUMMARY

PAGE 7 | EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

The Top 5 markets will generate OTT off-net termination revenues of $6.6 billion in 2013 and $36.5 billion in 2017. Interestingly, in 2013 the Top 5 markets will account for 84% of total global OTT off-net termination revenues, but this will drop to 68% in 2017 as other mobile markets get in on the act and their smartphone penetration increases.

Operators are now more open for partnering with OTT players,

compared to the results of last year’s whitepaper.

In summary, operators are now more open for partnering with OTT players, compared to the results of last year’s whitepaper, as they look to capitalise on the innovation emanating from the OTT communication space. Operators realise they need to act sooner rather than later and most have stated they now have a plan in place and have moved away from blocking, imposing surcharges or lowering the quality of service. Their original approach to make money from charging for data is declining, and their preference is to partner with OTT players by renting out virtual phone numbers and terminating OTT traffic as they can participate in revenue streams.

EXECUTIVE SUMMARY | PAGE 8

AN OVER-THE-TOP UPDATE

The driver for the accelerated adoption of OTT communication services (voice and messaging) over the last 12 months is the continued take-up of smart-phones. mobilesquared forecasts there will be 1.6 billion smartphones (in the top 68 mobile markets – see Methodology) by the end of 2013, and will increase to 3.1 billion smartphone users by 2017. Key markets, such as the USA, Germany, UK, South Korea, Canada, Netherlands, Australia, Sweden, Hong Kong, and Singapore will have over 85% smartphone penetration by 2017. Consequently, the potential number of OTT communication app-based users will double between now and 2017.

*TOP 68 MOBILE MARKETS (SEE METHODOLOGY)

SOURCE: MOBILESQUARED

The on-going adoption of smartphone users globally will have a direct impact on the increase in OTT communication users and usage. By the end of 2013, mobilesquared forecasts the number of users who use OTT services on their smartphones will be 925.5 million, and will more than double over the forecast period to 2.1 billion in 2017. By this time, the Top 5 smartphone-based OTT communication

markets (China, USA, Brazil, India and Germany) will account for almost 1.13 billion users.

The potential number of OTT communication app-based users will

double between now and 2017.

In 2013, OTT communications’ penetration of smartphone users is 55%, and this will increase to 66% in 2017.

These latest forecasts represent a significant uplift on mobilesquared’s original 2012 projections as outlined in the whitepaper “OTT Services: How Operators Can Overcome the Fragmentation of Communication”. As this whitepaper will demons-trate, there has been an exponential increase in OTT smartphone usage over the last 12 months, with two OTT messaging services, WhatsApp and WeChat, growing by over 375 million users.

*TOP 68 MOBILE MARKETS (SEE METHODOLOGY)


PAGE 9 | AN OVER-THE-TOP UPDATE

Smartphone forecasts, top 68 mobile markets

Smartphone-based OTT user forecasts





Interestingly, the accelerated OTT communication adoption over the last 12 months has been reflected by the mobile operators’ response to the survey question covering the percentage of their subscriber base that will be using OTT services in 2014. There is a considerable difference in the response compared to last year’s research. In 2012, the majority of mobile operators expected between 6 to 50% of their subscribers to be using OTT services. In 2013, mobile operators are clearly expecting a new wave of OTT users adopting the services in 2014, most likely based on what they have witnessed over the previous 12 months. The mobile operators also identified a maturing of existing users, with over one-fifth of operators expecting more than 50% of their subscribers to be using OTT.

Mobile operators are clearly expecting a new wave of OTT users adopting

the services in 2014.


THE SKYPE’S THE LIMITOTT communication services use mobile operator infrastructure to access the internet to deliver an array of communicative services from voice and video calls to messaging. There are established OTT players in this space like Microsoft-owned Skype and WhatsApp, and more recent additions like Viber and WeChat.

Skype now has over 1 billion sign-ups, though the company says it actually has 280 million active monthly users, of which 55 million users are logged on and using the service simultaneously at any one time during the day a figure that has risen from 42 million in 2012. Therefore, there are an additional 13 million people using Skype and potentially making voice and video calls, and messaging at any-one-time compared to last year. Mobile operators – in developed markets at least – can only dream of such user growth. To put that growth into context, at the end of June 2012 Vodafone Group’s total subscriber base had grown 1.7 million over the previous quarter. The most important figure from a mobile operator’s perspective is the amount of traffic Skype is now ge-nerating. In April 2013, Skype announced that its active users are now spending a total of 2 billion minutes per day on Skype. That equates to 730 billion minutes a year. On average, each of these active users spends just over 7 minutes per day, or 2,555 minutes a year using Skype communication services.

AN OVER-THE-TOP UPDATE | PAGE 10

What percentage of an operator`s subscriber base do you think will be using OTT services in 2014?


In 2012, mobilesquared estimated that Skype was costing the telco industry $41 million per day and $15 billion per year, based on the assumption that a call costs $0.05 per minute. When applying these latest numbers to the existing assumptions, that figure has rocketed to $100 million per day and a staggering $36.5 billion per year.

Skype user and usage figures are expected to continue to grow unabated. The Skype app is among the top 10 downloads of all time for Windows Phone, iOS and Android. In July 2013, Skype confirmed that its app had been downloaded over 100 million times by Android devices alone. As smartphone proliferation continues globally, Skype will consolidate its position as one of the leading cross-device communication services for end users, far removed from its original online PC-based beginnings.

In April 2013, Skype announced that its active users are now spending a total of 2 billion minutes per day on Skype.

In the mobile operator survey, 43% of mobile operators said that Skype presented a major threat to their revenues, especially now that it has the backing of Microsoft since its acquisition in 2011. An additional 14% of mobile operators believe it could potentially be a threat to their revenues if Windows devices become mainstream. Over a quarter of mobile operators claim to have not witnessed any increased threat from Skype to their revenues since the acquisition. The remaining 14% were either undecided or did not think Skype posed a threat to revenues.


WHATSAPPIn the last 14 months WhatsApp has exploded into life. In June 2012, there were 75 million WhatsApp users globally, sending 2 billion messages a day, equating to 27 messages per user per day. Based on 2009 to 2012 user adoption trends, mobilesquared last year projected the number of WhatsApp users would increase to 250 million by 2016. In April 2013, WhatsApp CEO Jan Koum announced the service was bigger than Twitter which has over 200 million active users. He then followed-up this statement in June 2013 by revealing that WhatsApp had around 250 million users, growing at a rate of 14.6 million new users per month. That represents user growth of 233% in 12 months. However, most recently in August, WhatsApp revealed that it had added a further 50 million users over the previous 2 months, taking its total to over 300 million users. And there are equally impressive numbers when it comes to traffic.


Since being acquired by Microsoft, has this impacted your belief that Skype presents a major OTT threat to operator revenues?



In June 2012, there were 75 million WhatsApp users globally, sending 2

billion messages a day.

In 12 months, the number of daily messages sent has increased from 2 billion to 10 billion, though that doesn’t reveal the true extent of the story. WhatsApp recently said that it had processed a record 27 billion messages in one day, with 10 billion inbound sent messages and 17 billion outbound received messages.

ALTERNATIVE OTT COMMUNICATION PROVIDERSIn the messaging and chat space, there is something of a land-grab underway. Viber now claims to be a proprietary cross-platform instant messaging VoIP application for smartphones, and continues to be hot on the heels of Skype with over 200 million users in almost 200 countries. The company is yet to generate revenues, but will launch a “sticker store” before the end of 2013. Stickers are characters engaged in various activities, a kind of next-generation emoticon, and have been instrumen-tal in generating significant revenues for Asian-based OTT communication providers. Since 2010 a number of alternative OTT chat apps have emerged in Asia to appeal to specific markets, but have actually gone on to become global successes. Since KakaoTalk launched in South Korea it has now amassed over 80 million users. A year later in 2011, Line launched in Japan and now has over 140 million users globally. In the same year, WeChat hit the smartphone space in China and now has over 400 million users around the world. In 2012,

WeChat doubled its user base from 100 million to 200 million in 6 months, and it had doubled its user base once more by June 2013. There are of course other players with millions of users such as Nimbuzz, Pinger, HIKE and eBuddy all to consider.

In the VoIP space, Rebtel’s worldwide user base of 23 million is dwarfed by the messaging and chat OTT communication providers, but the company can boast revenues of $80 million in 2012 and a projected turnover of $100 million for 2013.

One OTT communication provider starting to feel the competitive heat is Vonage. In the first quarter of 2013 its 7.2 million users generated revenues of $209 million down from $216 million in 1Q2012. The company attributed this “to fewer subscriber lines and the expansion of lower priced plan offerings to meet customer needs”. The VoIP provider is also experiencing sequential drops in ARPU (average revenue per user), highlighting the increasing levels of competition between OTT players.

In 2012, WeChat doubled its user base from 100 million to 200 million in 6 months, and it had doubled its user

base once more by June 2013.

As highlighted across Asia in particular, over the last 24 months there has been a growing proliferation of localised OTT communication providers, primarily in the messaging space. Given the majority of OTT communication providers are global, the lack of local knowledge and presence in the majority of markets by OTT service providers is an argument



being developed by the mobile operator community as they mount their counter-charge against the OTT communication players. Mobile operators have a very strong brand in their own local market, and a direct relationship with their customers, compared to the “impersonal service” provided by the global OTT companies.

One interesting point raised during the qualitative research is, when does a company like Apple contact a user if they haven’t used or purchased content on iTunes in the previous three months? The simple answer is they don’t, potentially leaving the door open for mobile operators to apply a strategy focusing on localisation and personalisation to maintain and enhance their direct relationship with their subscribers.

Despite the “impersonal” strategy employed by Apple, the global company continues to march on. There are now over 500 million iOS devices globally, with iPads accounting for almost 85 million devices. From those devices iMessage users now send over 200 million messages a day (or 73 billion per annum).

There are now over 500 million iOS devices globally, with iPads accounting

for almost 85 million devices. From those devices iMessage users now

send over 200 million messages a day.

And then there is the potential resurrection of Black-Berry as it looks to make its messaging service “BBM” cross-platform over Android and iOS devices. This is clearly a ploy to keep existing BlackBerry

users by ensuring they can interconnect with the more popular OS platforms. But whether this is too little or too late to redress falling global handsets sales for the Canadian company remains to be seen.

Operators are now more open than ever before to considering the

opportunity of partnership.

THE OPERATOR STANCE ON OTTMobile operators are under no illusion that OTT communication will have a financial impact on the industry. When surveyed, 36% of mobile operators expect WhatsApp to have the greatest impact on revenues. WhatsApp was followed by Google and Facebook, which both received 21% each of mobile operators’ responses, and followed closely by Apple on 14%. Surprisingly, Skype only attracted 7% of mobile operator responses – though when the impact of Skype, Google and Facebook were separated out within the quantitative research, Skype was considered the greatest threat. This is a strong indication that mobile operators are more concerned about declining messaging revenu-es than voice, and as a consequence are looking to partner with OTT communications providers, such as WhatsApp to offset the decline in traditional mes-saging revenues with an increase in OTT termina-tion traffic revenues, as outlined later in this report. Therefore, it could be argued that in the short term OTT communications will have a negative impact on messaging revenues, but a positive impact in the long term.



Consequently, operators are now more open than ever before to considering the opportunity of partnership to bolster their revenues.

GOOGLEGoogle+ Hangouts is viewed as something more of a threat than Facebook, with 29% of mobile operators believing it presents a major threat to their revenues. The same number of respondents said that they view Google+ Hangouts as just another OTT service, leaving 43% of mobile operators not believing that the service poses a major threat to their revenues. As with Facebook Home, mobile operators are not interested in partnering with Google+ Hangouts.

Where the potential threat lies with Google is that with Google+ Hangouts it is starting to build up a community. Because of its size and ability to innovate, Google is constantly linked with the OTT space and a possible strategy for messaging and communications as a means of monetising its community. Communications is not Google’s focus

because it is not an ideal underlying service to provide advertising, and until advertising becomes accepted by OTT users, Google is unlikely to seriously pursue the OTT opportunity.


With both Facebook and Google, mobile operators are wary of the threat both companies could pose, were they to utilise their resources and scale to deliver a compelling integrated OTT service. These OTT sleeping giants are clearly yet to identify a business case or user model for them to commit sufficient investment, but for mobile operators they remain a loaded gun.


Which OTT players will have the biggest impact on your revenues?”

Which of the following statements do you agree with regarding the impact Google+ Hangout will have on mobile operator

revenues and OTT usage?



FACEBOOKOnly 7% of mobile operators view Facebook Home as a major threat to their revenues, yet 64% view Facebook Home as just another OTT service to contend with, and a further 29% of mobile operators do not believe Facebook Home poses a major threat to their revenues. Interestingly, not one mobile operator would like to partner with Facebook Home.

29% of mobile operators do not believe Facebook Home poses a major

threat to their revenues.


In fact, the view that Facebook Home is “just another OTT provider” as highlighted in the mobile operator survey was supported by additional mobile operator research. Their view is that Facebook has become a platform (or ecosystem) and communication is a service that is largely overlooked by its users, and has consequently never featured as part of the company’s core product set.

Part of this reasoning, given Facebook’s scale, is that it needs to be more relevant and provide more tools for its user base to interact. What’s more, Facebook’s goal of encouraging people to spend as much time as possible on its platform is based on P2F (peer-to-Facebook) user behaviour, and is not traditionally associated with P2P messaging, especially on its mobile app.

Instant messaging and now Facebook VoIP launched in North America at the start of 2013, and France, Germany, Italy, Spain and the UK in March, have to be considered as services on its platform, but are not traditionally why people use Facebook. And if Facebook is to become a major threat to mobile operators, it will need to address this.

In recent months, Facebook has increased the prominence of chat on its Facebook Home service for Android devices, which suggests the company believes there is an opportunity to usurp Google regarding OTT communication on the vast Android platform. There are now over 750 million Android devices globally, and based on recent growth mobilesquared expects that number to surpass 1 billion devices in September 2013.

THE 2013 MOBILE OPERATOR MINDSETThe number of mobile operators that claim they do not know how to tackle OTT has risen from 0% to 7% between 2012 and 2013, though this represents a minority of the mobile operator community, and highlights almost all mobile operators do have an OTT plan or strategy now in place.

Which of the following statements do you agree with regarding the impact Facebook Home will have on mobile operator

revenues and OTT usage?


The number of mobile operators blocking OTT services peaked in 2012 with 11%, but has dropped in 2013 to 6%. Similarly, the growth in imposing surcharges in recent years from 5% in 2011 to 16% in 2012 has dropped to 0% in 2013. Blocking has certainly been viewed as a negative tactic deployed by mobile operators, while a surcharge can be viewed as a mobile operator tax. While the latter is understandable given that the OTT service is reliant on the mobile operator’s infrastructure, blocking access, or lowering the quality of the service, especially to prepaid users, is not consumer friendly and could potentially lead to churn.

Just over one-fifth of mobile operators are making money from OTT services

by charging for data.

But where mobile operators embrace OTT communication services, there continues to be a business case. Just over one-fifth of mobile operators are making money from OTT services by charging for data. However, the on-going research suggests that this figure is falling year-on-year, with almost 50% of mobile operators claiming to be generating revenue from OTT services in 2011, falling to 26% in 2012, and 21% in 2013. The results to this survey question reveal something of an anomaly, given the rise in data traffic and revenues, and would suggest mobile operators were ideally placed to exploit the rise of OTT usage.

One possible explanation for this somewhat unexpected response could be that access to OTT communication services is now being bundled by the mobile operator as part of their simplified post-paid

offering. And if so, this implies that the majority of mobile operators are adopting a dumb pricing model and not offering innovative OTT communication data plans.

A mobile operator offering its own client is losing its appeal with just 21% of mobile operators in 2013 claiming to, down from 26% in 2012. Perhaps justifying this fall is the increase in mobile operators that are partnering with OTT providers, up from 32% in 2012 to 36% in 2013. Alternatively, the need to offer their own client could be diminishing as the number of mobile operators deploys IMS/LTE to offer RCS/RCS-e. Interestingly, this number has dropped from 47% in 2012 to 29% in 2013. This is either because the mobile operator has now implemented an IMS core, or has delayed their investment.

mobilesquared introduced two new categories into the research for 2013, including the number of mobile operators expanding their SMS and MMS service offering. Already, this has become the most popular tactic used against the threat of OTT, with 43% of mobile operators deploying these services.

A mobile operator offering its own client is losing its appeal with just 21% of mobile operators in 2013 claiming

to, down from 26% in 2012.

Another very recent industry development is mobile operators partnering to combat the OTT challenge, though this only appealed to 7% of respondents.




All-in-all, the lack of imposing surcharges, lowering of blocking services, and the reduction in offering their own OTT client, suggests mobile operators are becoming more tolerant and accepting of OTT players, and also provides a foundation for mobile operators to partner with OTT providers, as the survey results, and also the qualitative research, suggest.


MOBILE OPERATOR STRATEGIESAs identified in the previous section, mobile operators are becoming more OTT compliant. Mobile operators have launched OTT communication-based data bundles. Mobily in Saudi Arabia, Airtel in Nigeria and SmarTone in Hong Kong are all offering data bundles with unlimited WhatsApp messaging, for example. More recently, a partnership between Globe Telecom and Viber will provide Filipino subscribers with voice, text and data bundled with Viber.

A number of mobile operators have launched their own messaging apps, such as Bobsled, Glow in the Philippines and Tu Me by Telefonica. mobilesquared

research reveals that the future of Tu Me is in doubt because of lower-than-anticipated uptake and usage, and Telefonica is in the process of reviewing whether to discontinue the service.

Tu Me is typical of the pressures mobile operators are facing when launching new services. Mobile operator OTT applications are emulating pure-play OTT communication players, but are later to market, so in theory they could be just as successful. But there is an issue of scale against the established OTT providers, coupled with the needs to monetise a service in a given timescale in a company accustomed to generating billions of dollars for services every quarter.

But the potential demise of Tu Me does not spell the end of Telefonica’s quest to find the next big thing. Wayra is the mobile operator’s start-up accelerator concept created to support early companies in the hope their innovation will uncover the next big thing.

TURKCELL GETS THE MESSAGETurkcell’s stance towards the challenge posed by OTT communication providers is clear it is going head-to-head and looking to compete using mobile operator capabilities to continue generating revenue with new services using not only SMS, but new messaging services and RCS.

For Turkcell, its aim is to increase messaging revenue with what it describes as “new attractive services”.

In April 2013, it launched its next generation of messaging, and where possible, has applied voice

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capability, such as now offering an SMS forwarding service. But it has also launched an SMS signature service, as well as an SMS Blacklist for unwanted SMS and a Whitelist.

Since the launch, it is signing up 1,000 customers a day, which means the company has somewhere in the region of 100,000 by the end of July 2013. By supporting the service with a strong advertising campaign it expects to hit 1 million users by the end of the year.

Quite rightly, Turkcell identifies that OTTs have become successful because of the smartphone, inspiring it to develop these new SMS services to also target feature phone users. Of course, when the mobile customer upgrades their device onto a smartphone, it should ensure that Turkcell retains that messaging relationship and prevents the customer from downloading apps. In Turkey, smartphone penetration stands at 16 million, 24% of the market, meaning the market is still dominated by feature phones.

In Turkey, smartphone penetration stands at 16 million, 24% of the

market, meaning the market is still dominated by feature phones.

As the mobile operator survey has revealed, Turkcell will be one of many mobile operators looking to deliver a next generation messaging strategy to its customer base. Whether or not the mobile operator response was referring to Joyn remains to be seen, but both the quantitative and qualitative research uncovered a growing concern with the ability of Joyn to provide mobile operators with the solution to tackle the OTT messaging boom.

JOYN MEJoyn is the collective mobile operator response to the threat of OTT communication to generate revenues and leverage their infrastructure. The service is being labelled as a default communication ecosystem, rather than a messaging service.

Joyn is one example of mobile operators emulating OTT communication services, and will offer chat, share files over a running voice call, and incorporate the user’s location.

In the countries where Joyn has been launched, it can be a native integration on the device, or is available as an app. The strategy behind launching a Joyn app allows customers to adopt the service before they upgrade their device with Joyn embedded. In developed markets, mobile phones are typically upgraded every two years.

Like existing pure-play OTT messaging services, if both users are Joyn, the messaging will be over Joyn, but if the recipient is not on Joyn the message will revert onto SMS. But if the user has a Joyn-enabled device and receives a message from a Joyn user in their address book, it will provide entry into the service.

The consumer perception will be that Joyn is free, as consumers won’t pay for a service they can already get for free, but a number of mobile operators are effectively bundling the data costs of Joyn.

JOYN FRUSTRATIONIs Joyn the solution that will help mobile operators tackle the threat posed by OTT players? The survey




reveals that only 7% of mobile operators said “yes”, with a further 29% believing Joyn was the solution but “has taken too long to launch”. It has taken seven years from concept to commercial launch, compared to 6 months for WhatsApp. Of the remaining 64% of mobile operators, 29% believe Joyn is not the solution, with a further 35% uncertain of the impact Joyn will have on their positioning to tackle OTT services. This means only one-third of mobile operators have a positive stance towards Joyn.

Only one-third of mobile operators have a positive stance towards Joyn.


Additional qualitative research by mobilesquared confirmed the uncertainty of Joyn as the mobile operator answer to challenge OTT communication. The time to commercially launch the service has clearly cast doubt over the service. What’s more, for it to truly challenge the global OTT powerhouses it would need to have a similar global offering only achievable if every mobile operator signs up. The belief across the industry, and not just among mobile operators, is that this will not happen. After all, SMS

only became a core communication service when mobile operators interconnected. And given that much of the appeal of OTT services is their international connectivity; this will be a critical feature for Joyn.

But the potential frustration that has developed around the slow commercialisation of Joyn is symptomatic of mobile operators. Mobile operators are faced with a multitude of opportunities from numerous sectors, and now have teams exploring potential digital services. In doing so, a number of mobile operators believe they are spreading themselves too thinly across multiple verticals, but feel compelled to do so because this is still the betting phase. All the while, the mobile operators must protect their core voice and messaging revenues. This is placing heightened pressure on the creation of new business models. In this evolving communications space with the introduction of OTT players, mobile operators need a degree of flexibility and innovation to ensure they adapt with their environment.

As one mobile operator mentioned during the research process, they can make a decision and then instantaneously regret it. But start-ups can make one decision and commit 100% of their time to making that decision a success.

In this evolving communications space with the introduction of OTT players,

mobile operators need a degree of flexibility and innovation to ensure they adapt with their environment.

Do you believe Joyn will be the solution that mobile operators are waiting for to tackle the threat posed by OTT players?


An interim solution to access innovation is through partnerships, though mobile operators fear brand dilution if they were to partner with a Google or Facebook, for example.

In the OTT communication space, mobile operators are competing with companies operating within a start-up mentality. Start-ups focus on delivering one service or product, compared to a mobile operator trying to please millions of individual customers with a portfolio of services.

Another notable factor is that OTT providers are software people, and their focus is on the data connection and not on partnering with mobile operators. Start-ups view the carrier and data as a way to drive their product forward.

What’s more, the investment community continue to believe in the OTT space and pump significant investment into it. For example, HIKE which now has 5 million users in 4 months has raised $7 million. MessageMe has raised $10 million in Series A funding, and Snapchat is in talks to raise $100 million against a valuation of $1 billion.

IS THE TIME TO ACT NOW?With the accelerated user adoption of OTT services over the last 12 months predicted to increase over the coming years, mobile operators have to act now to preserve voice and messaging revenues. But is the OTT communication impact on their business today inspiring the mobile operators to proactively develop an OTT strategy?

In total, over 56% of mobile operators said that messaging was in decline, either SMS only (20%) or

MMS only (3%), leaving the remaining one-third of mobile operators stating that their overall messaging traffic was in decline. Of the 44% of mobile operators that claimed they were experiencing a year-on-year increase in messaging traffic, 17% said the growth applied to both SMS and MMS, while 20% said SMS only and 7% MMS only.


This confirms the mobile operators’ fears from last year’s research where 68% of mobile operators believed that SMS traffic was the most threatened service by OTT communication.

68% of mobile operators believed that SMS traffic was the most threatened

service by OTT communication.

Of those mobile operators that are experiencing an increase in messaging traffic, 29% claim overall messaging traffic is up by between 1-5%, 43% of those mobile operators cited a 1-5% increase in SMS traffic, while 14% said they experienced an increase of 6-10%, and an additional 14% of mobile operators said SMS traffic had grown by over 11%. Despite 7% of mobile operators claiming to experience an


What is happening to your messaging traffic, year-on-year?



increase in MMS in the previous question, not one mobile operator revealed the extent to which MMS was increasing.


Of the 56% of mobile operators which claimed they were experiencing a decrease in messaging traffic, almost half of those operators were experiencing an overall decline in messaging traffic of 1-5% (21.4% of those operators), 6-10% (7.1%) and over 11% (14%). The remaining mobile operators revealed that 21.4% were experiencing a decline in SMS traffic of 1-5%, and 14% were experiencing a decline greater than 6%. For 21% of mobile operators, they were experiencing a drop in MMS traffic of 1-5%.

In two years, between 2011 and 2013, the research shows that the number of mobile operators stating that they had not experienced a drop in messaging revenues as a direct result of OTT clients on smartphones has almost halved from 62% to 36%. Although there were fewer mobile operators impacted by OTT in 2011, there was a spread of mobile operators in 2012 that had experienced a drop in

revenues. However, in 2013, some 28% of mobile operators had experienced a drop in revenues of up to 15% compared to 42% in 2012, but for the first time in the research process, 14% of mobile operators are claiming that OTT has created a loss of messaging revenue of more than 21%.

For the first time in the research process, 14% of mobile operators are

claiming that OTT has created a loss of messaging revenue of more than 21%.

One positive that can be extracted from this latest round of research is that the number of mobile operators that are not experiencing a decline in messaging revenues has increased from 32% in 2012 to 36% in 2013.


Given the rise in OTT users and usage over the last 12 months, this is yet to translate into a steeper decline in mobile operator messaging revenues. Admittedly, a proportion of mobile operators have already experienced a revenue drop of more than 20% and that figure will inevitably increase, so the time to act is now.

If your messaging traffic is increasing, by what percentage?

Have you seen operator revenues for messaging decline over the past 12 months as a result of increased use of OTT clients on smartphones?

FORECASTS

mobilesquared believes there are three key factors that have emerged during this latest research. Firstly, the acceleration of OTT adoption. Secondly, the concerns circulating within the industry questioning the impact of Joyn, and lastly, the rise in mobile operators partnering with OTT providers. When combined, the rapid adoption of OTT services is forcing mobile operators to act now and partner with OTT providers instead of waiting for the much-coveted Joyn.

But there are alternative solutions that allow mobile operators to tap into the OTT opportunity, and that is how they must view OTT. The subsequent impact of more OTT users presents a marked increase in OTT traffic termination for mobile operators, especially given the proliferation of OTT services.

mobilesquared forecasts that the global telco opportunity for OTT off-net communication termination will be worth $53.7 billion in 2017, a substantial increase from the $7.9 billion revenues in 2013. In 2013, the termination of OTT off-net communication fixed-line traffic represents the greatest revenue generator for telcos, worth $4.2 billion in 2013 rising to $20.3 billion in 2017. But over the forecast period, that figure will be overtaken by OTT off-net communication mobile traffic termination revenues, generating $2.2 billion in 2013 and leaping to $23.7 billion in 2017. SMS termination will account for $1.4 billion in 2013, increasing to $10 billion in 2017.

mobilesquared forecasts that the global telco opportunity for OTT

off-net termination will be worth $53.7 billion in 2017, a substantial increase

from the $7.9 billion revenues in 2013.


Operators are now more open for partnering with OTT players, compared to the results of last year’s whitepaper. Operators realise they need to act sooner rather than later and most have stated they now have a plan in place and have moved away from blocking, imposing surcharges or lowering the quality of service. Their original approach to make money from charging for data is declining, and they prefer to partner with OTT players by renting out virtual phone numbers and terminating OTT communication traffic as they can participate in revenue streams.

FORECASTS | PAGE 22

OTT traffic termination revenues ($)

KEY MARKET DATA

PAGE 23 | KEY MARKET DATA

USThe US will have 186.7 million smartphone users by the end of 2013, of which 93.4 million will be using OTT communication services. By 2017, those figures will increase to 288.5 million smartphone users and 230.8 million OTT users. Over the forecast period, the OTT communication penetration of smartphone users will increase from 50% to 80%.


Throughout the forecast period, the US will remain as the second largest mobile market behind China, in terms of both smartphone users and smartphone- based OTT communication users. By 2017, the US will account for 12% of total global smartphone-based OTT users.

Terminating OTT off-net communication traffic revenues in the US will be worth $1.8 billion in 2013 and $8.8 billion in 2017. During this timeframe, OTT off-net communication mobile traffic termination revenues will generate $225.8 million rising to $2.6 billion, while OTT off-net communication SMS traffic termination revenues will generate $84 million increasing to $955 million.

By 2017, the US will account for 12% of total global

smartphone-based OTT users.


UKThe UK will have 51.4 million smartphone users by the end of 2013, of which 24.7 million will be using OTT communication services. By 2017, those figures will increase to 71.1 million smartphone users and 56.2 million OTT communication users. Over the forecast period, the OTT communication penetration of smartphone users will increase from 48% to 79%.


Smartphone-based OTT users, US

OTT termination forecasts, US ($)

Smartphone-based OTT users, UK

KEY MARKET DATA

Terminating OTT off-net communication traffic revenues in the UK will be worth $195 million in 2013 and $1.4 billion in 2017. During this timeframe, OTT off-net communication mobile traffic termination revenues will generate $59.7 million rising to $621.5 million, while OTT off-net communication SMS traffic termination revenues will generate $22.2 million increasing to $232.7 million.

The UK will have 51.4 million smartphone users by the end of 2013,

of which 24.7 million will be using OTT communication services.


THE TOP 5 SMARTPHONE-BASED OTT MARKETSThe Top 5 smartphone-based OTT communication markets, led by China and followed by the US, Brazil, India and Germany, cumulatively total 624.1 million users in 2013, and account for 67% of the total global user base. Admittedly, China makes up a substantial proportion of that figure with 445.9 million. By 2017, the Top 5 markets will total 1.3 billion users, though their contribution to total global users would have fallen to 62% as other markets make minor inroads on the leading five’s dominance.


The Top 5 markets will generate OTT off-net communication termination revenues of $6.6 billion in 2013 and $36.5 billion in 2017. Interestingly, in 2013 the Top 5 markets will account for 84% of total global OTT off-net termination revenues, but this will drop to 68% in 2017 as other mobile markets get in on the act and their smartphone penetration increases.

The Top 5 markets will generate OTT off-net termination revenues

of $6.6 billion in 2013 and $36.5 billion in 2017.

KEY MARKET DATA | PAGE 24


Top 5 smartphone-based OTT markets

OTT termination revenues, UK ($)

OTT termination revenues, top 5 markets ($)

KEY MARKET DATA

PAGE 25 | KEY MARKET DATA

Sources:Mobile operators included in the OTT research are: 3UK, A1 Telekom Austria, Airtel, AT&T, Bangl-alinkGSM, Bouygues Telecom, CYTA, Deutsche Telekom, Du, Etisalat, EverythingEverywhere, Globe Telecom, H3G Italy, Maxis, MTS, O2 UK, Orange France, Orange LA, Orange Poland, Orange UK, Qatar Telecom, Sprint, Starhub, Swisscom, Tele2 Lithuania, Telecable,Telecom Italia, Telefonica Spain, Telefonica UK, Telekom, Telenor, TeliaSonera, Tigo, T-Mobile Czech Rep, T-Mobile Germany, T-Mobile In-ternational, T-Mobile Netherlands,T-Mobile UK, Turk-cell, Vodafone Germany, Vodafone Hungry, Vodafone Italy, Vodafone UK and Zain.

NB: Not all operators wanted to be listed.

The 68 countries researched are: Algeria, Argentina, Austria, Australia, Azerbaijan, Bangladesh, Belgium, Brazil, Bulgaria, Canada, China, Chile, Columbia, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Greece, Germany, Guatemala, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Lebanon, Lithuania, Malaysia, Mexico, Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Peru, Phi-lippines, Poland, Portugal, Romania, Russia, South Africa, Saudi Arabia, Singapore, Slovakia, South Korea, Spain, Sri Lanka, Sweden, Taiwan, Thailand, Turkey, UAE, UK, Ukraine, USA, Venezuela and Vietnam.

ABOUT TYNTEC

tyntec is a mobile interaction specialist, enabling businesses to integrate mobile telecom services for a wide range of uses – from enterprise mission-critical applications to internet services. The company reduces the complexity involved in accessing the closed and complex telecoms world by providing a high quality, easy-to-integrate and global offering using universal services such as SMS, voice and numbers.

Founded in 2002, and with more than 150 staff in six offices around the globe, tyntec works with 500+ businesses including mobile service providers, enterprises and internet companies.

For more information: www.tyntec.com

ABOUT MOBILESQUARED

mobilesquared is quite simply the best provider of intelligence and insight on the mobile sector. We excel at conducting dynamic research and writing amazing copy. Our analysts have been covering the mobile space since phones were like bricks, and this experience allows us to transform our research into expertly crafted reports, whitepapers, publications, and presentations that deliver big on ROI for our clients. Plus we can offer bespoke 3-year data forecasts broken down by device, age, gender, location and socio-economic status using our exclusive proprietary Mobile Trends Platform tool. Clever eh. And because we’re small, we’re flexible, completely independent, and very cost-effective. Learn more about how we can help you by paying our site a visit www.mobilesquared.co.uk.

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