MVentur memo: Q1 2013

DEALING WITH OTT: OPERATORS NEED TO KEEP YOUTH ON BOARD

Youth OTT usage will force operators to change their revenue models for the better

Mobile phone’s primary usage shifted from voice to data back in 2010. Industry data shows that global voice traffic has been stagnant since 2010 while data traffic has been increasing exponentially. In 2013 data will surpass voice in revenues as well. The successful operator of tomorrow is the one built around data.

Per-minute, per-event charging models will be rendered useless and unless operators adopt a more customer-focused mindset they leave themselves open to exploitation by OTT players. “It’s a strange business model at present where telcos invest huge amounts of money to upgrade data networks and players like YouTube, who gets the revenue, don’t pay anything.” Vodafone India’s Managing Director and Chief Executive Officer Marten Pieters.

"Around 18 months ago we started noticing that people were using more Skype, people were using Viber and What's App," Vodafone Chief

Executive Vittorio Colao told the Mobile World Congress industry meeting, referring to three apps that let users route phone calls or messages through data plans. "And our SMS revenues started going down. So we asked them why and it was a very simple answer. It was because it was free," he said. "So we decided to turn the model upside down."

Over the top (OTT) players are eating up the market with messaging and content services that drive revenues off the operator bill. As players like Google have already shown in the fixed line market, incumbents are seriously exposed to game changing shifts. In response, mobile operators need to evolve their charging models or end up left on the shelf like the record labels in the 90s.

Operators have 3 options in mitigating the threat from OTTs:1. Produce their own content or charge for added value (e.g. 4G)2. Sign more deals with OTTs3. Charge more

Looking at the evidence, we recommend that operators charge more for data. To get mobile prices back up, some operators are planning to charge a premium for faster 4G networks. EE, the first to launch 4G in Britain, has chosen to charge higher prices for new service, but has not disclosed how many customers it has won.

In Norway, Telenor increased ARPU by 2% in 2012 by charging more (compared to a 4% decline in rival Teliasonera). Telenor found that data usage varied widely by user and there was a significant number of customers willing to pay extra for more data allowances (Telenor’s standard offering was 400Mb per month).

Young people are the heaviest users of data. One of the reasons youth ARPU has been in decline since 2008 is because operators have been preoccupied with monetizing voice & text while ignoring the potential demand for more expansive data offerings. Because operators are not providing data tariffs that fulfil youth mobile behavior, they are both losing the youth market and its revenues.

WHAT DO OPERATORS NEED TO DO?

If operators adopt a wait-and-see approach to OTT entrants they will lose.

The famous Darley and Latané “smoke in the room” experiment showed how people failed to react to warning signs if they were surrounded by cohorts who pretended nothing was happening.

As OTT players enter the mobile industry, telecoms operators too risk sitting around watching the smoke creep under the cracks in the door. When Google entered the fixed line internet market in the US, it didn’t offer marginal improvements over rivals at 20 or 30MB/s but went in at a full 1GB/s, catching all the incumbents by surprise. Players like Google, Facebook and Amazon are simply playing a waiting game, mollifying operator concerns until they occupy a position of strength to exert change. At that point, it may well be too late for operators to react.

The successful operator of the future is one that recognizes its place in the mobile industry and reacts now to the early warning signs of smoke. In the Darley and Latané experiment, they found that when subjects sat in alone in the room they reacted fast and without hesitation. Survival, therefore, may require some operators to go it alone.

The watershed of 2013 will define how operators deal with the paradigm shift. Those that hang on to the old school world view of telecoms brands being strong media players will also be those that face the biggest challenges in negotiating change.

Rather than look at competition, operators need to focus on getting their own fundamentals right. There is a lot of money to be made out of providing a simple, reliable experience (e.g. Toyota, Ikea). The challenge for operators is letting go of the old-school mindset that has them chasing technologies and winning awards.

Operators that strike out now and reform their charging models are the ones that will survive and grow in the next 5 years.

Graham Brown, Lead Consultant MVentur.

About MVentur

MVentur is the world’s first youth mobile consultancy.We have 2 roles:

1) Advisor to our clientsWe oversee marketing plans, act on advisory panels and consult our clients. Find out more about our consultancy work.

2) Commercial think tank for the mobile industryWe promote progressive marketing ideas that help mobile companies go beyond advertising. Read more about our youth mobile opinion pieces.

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