The following special column is an excerpt of a presentation given by Tarifica at the Pricing Mobile Data Conference in London.
Since coming to popularity, Over-The-Top (OTT) services have proved a serious challenge for mobile network operators (MNOs). These internet-based services ride on top of operators’ networks, and those that offer free or reduced-cost messaging or calling compete directly against operators’ core sources of revenue.
OTTs are a threat to the foundation of the traditional MNO business model. This challenge is driven by two factors: First, OTTs have the capacity for rapid, viral growth—services can rise quickly and add users at a pace that changes a market’s fundamental dynamics before MNOs can execute a strategic response. Second, these services tend to significantly reduce operator revenues—the increased data usage from OTT messaging does not even come close to making up for the loss of SMS and voice revenues. It is estimated that, on average, SMS messaging generates 50,000 times more revenue per megabyte than data usage.
Given the ever-expanding number of services that OTTs provide and the popularity of these services, the ultimate conclusion of this trend could be the so-called “bit pipe” scenario, in which all industry innovation—and profits from that innovation—move to external players and MNOs are effectively transformed into utility companies that sell mobile data access. In this scenario, data becomes a commodity with ever-decreasing returns, and MNOs are only able to differentiate their services on the basis of network strength, speed and price.
Understanding the stakes of this existential threat, MNOs have tried many strategies to mitigate the effects of OTTs, slow their growth or recreate OTT offerings under MNO auspices. All of these strategies have either not achieved the scale needed for replication or have failed outright. Given the magnitude of the challenge facing the industry and the inability of conventional options to address it, it is time for MNOs to embrace a radical solution—moving away from plans structured around voice and SMS features and partnering with OTTs to build plans that leverage the strengths of both OTTs and operators.
Tarifica believes that MNOs should embrace a strategy of partnering with selected OTTs and building targeted plans with them. This approach offers operators three critical benefits:
- Marketing Enhancement—MNO/OTT plans provide significant branding advantages to operators by linking mobile services with “trendy” companies and providing operators with the ability to advertise the real-world benefits of these services—such as advertising WhatsApp messaging, Skype video calling or Spotify music streaming—rather than the abstract concept of data, which is often hard for consumers to grasp.
- New Revenue Stream—While OTTs have excelled at customer acquisition, many have not yet identified how to monetize this huge base of users. Critically, many lack a fluid, in-app solution for selling users premium content. This opportunity pairs well with MNO strengths and needs alike. MNOs can offer partner OTTs direct-to-carrier billing, which would provide users with an instantaneous and seamless means of paying for services. For operators, this would provide a tie-in to a new and expanding source of revenue.
- Reduction of Tensions With OTTs—By establishing a shared revenue source with OTTs, MNOs will create a direct channel to some of the most dynamic actors in the market and, ultimately, foster a climate of mutuality with these actors in which all have strong incentives to build a future environment where both entities will flourish.
MNOs that succeed in this new frontier of mobile offerings will likely operate under several guiding strategic principles as they adjust to this significantly different environment.
First, any new plans created will offer significant revenue upside for operators—whether through decreased churn, increases in existing revenues or new opportunities. Operators that enter this arena halfheartedly without a clear understanding of OTTs and a specific strategy for how to leverage their strengths will be unlikely to have any success.
Second, successful operators will create plans that are truly symbiotic and sustainable for themselves as well as for the OTTs involved. Many MNOs will be tempted to push for substantial concessions from partners that will undermine the core of the OTT business model. These plans will be rejected by popular OTTs and leave these MNOs working with inferior partners.
Finally, successful operators will act decisively to forge new partnerships and bring these plans to the market. As noted, OTTs excel at identifying market needs and adapting rapidly in order to provide new services. To succeed in this environment, MNOs need to emulate this culture of institutional nimbleness. The success of these kinds of initiatives will depend on capturing fleeting market opportunities, and the most successful MNOs of tomorrow will be those that adapt institutionally and embrace the expectation of rapid change.