Analyst Angle: 3 Group shows the way for carriers to partner with OTTs

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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.

Three Group has often been ahead of the curve when it comes to taking innovative services to the market; for example, it launched the U.K.’s first 3G network ahead of competitors. It is no surprise that Three is also ahead of the curve with its strategy for over-the-top (OTT) communication services. In September, Three Hong Kong launched a WhatsApp data pack and a WhatsApp roaming pack, enabling customers to enjoy the full functionality of what is arguably the most popular OTT communications app in the world, both at home and abroad.

The data pack provides unlimited WhatsApp usage in Hong Kong, on top of an existing monthly plan, while the roaming pass leverages Three Hong Kong’s membership in the Conexus Mobile Alliance, an Asian mobile roaming alliance, to provide unlimited usage at 78 destinations. This kind of partnership represents a breakthrough in the way mobile operators deal with OTTs.

So far the debate has largely focused on the menace that not only WhatsApp but also Skype, Viber and many other services like these, pose to operators. “How to combat the OTT threat” has been an industry-wide debated issue. Although OTT events are often incremental to core operator services and although operators do benefit from OTTs in terms of increased uptake of data services, there is no doubt that OTTs do cannibalize voice and especially the cash cow of SMS. What is worse for operators is that since they are delivered over the open Internet, OTTs completely bypass the operator’s billing and service delivery infrastructure.

The response from operators has been varied, ranging from the most protective approach of blocking and degrading OTT communication to the use of pricing as a neutralization strategy, such as increasing bundle sizes and leveraging integrated pricing so that customers do not need to use OTT services to save money. Operators have also introduced app-based pricing mechanisms to generate revenue from OTT. In this way, they have leveraged the demand for OTTs to upsell data plans to customers and offset SMS cannibalization by boosting data usage.

These initiatives will help operators in the medium and short term, but in the long run, they are difficult to sustain. What is clear is that if operators do not want to be sidelined, they need to be able to offer the same rich experience that Internet services provide by either launching their own services or partnering with OTTs. While building a critical mass user base from scratch for their own OTTs would be a big challenge for any operator, partnerships with OTTs allow operators to benefit from OTT strengths, including size and reach, from day one. Certainly partnering with OTTs also means that operators bolster the cannibalization of a core service such as SMS by supporting alternative messaging options. But in an increasingly data-driven, app-driven world, operators will have to look at new ways to profit from messaging other than banking on endless growth of the SMS cash cow.

There are several reasons to think that Three is heading in the right direction by partnering with WhatsApp. First, the operator is able to enhance its brand by proximity and association with a popular Internet brand, which ultimately contributes to customer loyalty and churn reduction. Second, the partnership with WhatsApp also has an impact on revenues because it provides Three an opportunity to increase both the range of services offered and the number of potentially billable events. The latter aspect is critical not only for operators but also for the OTTs, which can use carrier billing and the operator’s billing relationships with customers to drive the monetization of content. Revenue sharing with operators helps OTTs enhance business models that today are still basic and largely based on freemium and advertising. Finally, by partnering with WhatsApp, Three brings a competitive threat to other OTTs, for example BlackBerry Messenger, which is highly popular even in emerging markets, such as Mexico, Indonesia and South Africa where smartphone penetration is comparatively lower.

On balance, partnering with OTTs benefits operators in many ways and overall is the most future-proof strategy to deal with the so called OTT threat.

Daniele Tricarico is an analyst for Latin America at Pyramid Research

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