Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
There is no doubt that the question of what to do with over-the-top content (OTT) will be very high on the agenda of mobile operators in 2012. Whether they will continue to see OTT messaging apps such WhatsApp and Viber as a menace or rather as an opportunity for growth will largely depends on specific market conditions. What is clear is that some operators have come to realise that if you can’t stop the inevitable you need to find a way to make it work to your own advantage.
In Latin America, Telefonica is possibly the most prominent example of an operator with a proactive approach towards OTT messaging. At the end of last year the Spanish group launched its own-branded low-cost smartphone and tablet, respectively dubbed ONE and ONE pad. The fact that an operator was directly addressing the demand for high-end devices and data services was significant per se, but perhaps even more interesting was the fact that Telefonica was preloading on the devices a number of apps, including the famous or infamous, depending on the point of view, WhatsApp. The operator is also directly promoting WhatsApp. In Colombia, faced with a strong decline in SMS traffic and revenues in the 12 months to end-June 2011, the operator started a WhatsApp promotion, under which customers could download the app via Wi-Fi without charge and directly from the operator’s app store. These examples present us with an operator pushing to its customers WhatsApp, undeniably the most formidable menace to the P2P SMS cash-cow.
To many the rationale to justify such a move remains unclear: If P2P SMS is a cash cow and if OTT messaging cannibalises SMS, then why would an operator push WhatsApp to its customer base? An easy way to answer would be: It’s because customers like it. Clearly users like OTT not only because it is perceived as free, but also because its “always-on” functionalities better fit with new ways of interacting. To date the most relevant example of OTT messaging success in Latin America is RIM’s Blackberry Messenger (BBM). If we look at Venezuela, one of the leading RIM markets in the world, it is clear that BMM is a perfect fit for the way Venezuelans communicate, enabling users to hold several informal conversations at the same time and show their feelings through emoticons. In other words, OTT messaging in its several manifestations is better than anything mobile operators have ever come up with.
It must also be said that although SMS remains a major revenue generator, it has also been a commoditised revenue generator for many years. SMS remains a service entirely based on volume rather than value. There are little signs of de-commodisation. In Latin America like in other emerging markets, SMS has found a way to increase its value by serving as a platform to deliver messaging VAS, such as instant messaging (IM), social networks and mobile email, to the vast prepaid base of low end-devices and feature phones users. In this way it has offered access to the basic functionalities of Twitter and Facebook, and their likes.
This trend however only confirms that the game for the evolution of messaging is entirely played in the OTT field. Driven by the youth and tech savvy, OTT messaging substitution is growing.
Even so, the main question remains: Why would you kill the SMS cash cow by stimulating the uptake of OTT, on which the operator has no control or commercial return? The problem lies in the assumption that OTT is free to users. The aforementioned example of Telefonica in Colombia shows how the operator, in a prepaid-dominated market, is using the demand for WhatsApp to migrate users to more lucrative postpaid smartphone data plans. The rationale is that by providing access to OTT messaging, the operator is able to upsell customers to data plans, which will in turn increase overall monthly customer spend at the expense of cannibalising SMS revenues.
It remains to understand whether the gamble will eventually pay back. There are conflicting reports from operators on the extent to which IP-based messaging is cannibalising SMS. Turning to mature markets, in its most recent quarterly report Vodafone seemed happy with the way it was managing the transition to non-SMS messaging through integrated price plans. The operator found that postpaid smartphone users were generating €5 higher ARPU than non-smartphone postpaid ones, offsetting the reduction in traditional non-SMS messaging. Dutch operator KPN was less enthusiastic. Last year KPN attributed a 10% annual decline in SMS revenues to changing consumer behaviour preferring messaging apps to voice and SMS.
Even if data growth and migration to postpaid contracts may compensate for SMS (and voice) cannibalisation by OTT providers, operators need to find ways to keep hold of the messaging and voice markets. By now, operators should have learnt that they are not best placed to innovate in the content world, that such innovation tends to come from the Internet world, and that they need to adapt to the emergence of innovative apps and business models. There certainly are examples of operators “doing it by themselves”, like America Movil entering the IP-messaging world with Claro Messenger, the first operator-owned IM community in Latin America. However, such examples represent the exception rather than the norm. Claro Messenger makes sense given the operator’s size and regional dominance, making it a potential option for users.
Coming back to the original question on what mobile operators should do with OTT messaging: If they cannot control innovation in content creation, they should be able to control the way customers access their favourite apps. Pricing is the key word. As shown above, OTT demand is already serving to speed up the migration to postpaid data plans. Operators can do more, by moving away from unlimited data plans to charging users by access, and by charging companies in adjacent sectors for access. Telefonica in Latin America has successfully debuted pricing models whereby prepaid customers are charged by access to applications or clusters of applications, such as unlimited access to social networking, the so called “paquetes de Internet”. It certainly makes little sense to block OTT. They seem to have realised that protectionism does not pay back: You don’t prevent people from having access to what they want, you make them pay for what they want. History proves that it works.
Daniele Tricarico is a senior analyst at Informa Telecoms & Media, where he tracks the evolution of the telecoms ecosystem in Latin America.