d1 1150 david kennedy

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The Future of Voice

David Kennedy, Research Director, Ovum

CommsDay Summit, Melbourne

9 October 2012


Agenda/Outline

Executive summary

Where we are now - and how did we get here

The OTT landscape

How telcos can respond

What happens next


Where are we now? Voice revenues on both fixed and mobile networks are declining

Not principally a result of competition from VOIP

Peer competition, regulation and strategic decisions

Messaging revenues have already been hit hard by IP-basedmessaging, especially from social messaging

The estimated loss was 6% of total messaging revenue in 2010and 9% in 2011

Voice revenues have not been hit as hard thus far – messagingis easier to do than voice

Spectre of VOIP is haunting the industry

VOIP has hit the most lucrative services (e.g. international) hardest

VOIP hasn’t hit mobile hard yet – but the barriers are coming downand there is more pain to come


Why telcos should care

The direct impact on revenue is already considerable, and it isgrowing fast

It’s a tipping point phenomenon – once a critical mass of users haveadopted an OTT application, it spreads very rapidly throughout thewhole user base

In Korea the take-off point for Kakao Talk was 10%

Orange Spain believes the take-off point for WhatsApp was 5%

It loosens the already-weakening bonds between telco and customer

When customers get their services from another entity, the telcobecomes an invisible pipe

Increasing churn and thus reducing profitability

Reducing the prospects of up-selling new services to the customer


How did we get here?

Very long term trend – communications prices havetracked underlying costs

In 1927 a five-minute call from NY to London cost $75 –at least $900 in today’s money

In 1961 a US long-distance call cost $12/minute – atleast $70 in today’s money

Regulation and hyper-competition

30 years of regulation designed to weaken the marketpower of the telco has achieved the desired objective

Strong relationship between HHI and ARPU – the morecompetitive the market, the lower the ARPU

The shift in power from the network to the end-point

The advent of the PC put processing power in the handsof the user – even before the move to IP

The smartphone is the natural continuation of this trend


A ‘perfect storm’ will drive OTT VOIP on mobile

• More bandwidth, easier use of VOIPBetter bearers

• More WiFi (including operator WiFi) makesVOIP easier and cheaperWiFi – the second coming

• VOIP easier to install, easier to use, easierto develop and upgrade client softwareSmartphones and tablets

• More use of VOIP in other contextsdetaches customer from MSISDNEmbedded voice/VOIP

• More brains to develop, more marketpower to promoteNew VOIP players

• A counter-trend, because mobility hastaken customers away from the desk/homeLong-term FMS


There is worse to come

• Strategic extensions of existing major players• The next Facebook/WhatsApp/GoogleVoicePlayers

• More and better sensors, and apps to make use ofthem

• Cheaper smartphones, and feature phone apps• OTT in more devices/platforms• SoftSIM/eUICC, Y-Comm and the ‘nightmare phone’

Devices

• OTT apps with contextual awareness from other cloud apps• Better integration of OTT apps with telephone numberservices

• VOIP add-ons and embedded VOIP in other applicationsApplications


For users, the telephone no longer comes first Substitution effects between different

communications services

Ovum’s own research with UK consumerssuggests that other communicationsmodes are often the first choice for usersto communicate with each other

30% of 16-24 year-olds say they makefewer mobile voice calls because of socialnetwork messaging

Ethnographic research by ProfessorSherry Turkle of MIT suggests that wereally are talking less – part of a biggercultural change

Mixed evidence from the traffic data aboutthis

Voice MoU is increasing in most markets– with a few exceptions


OTT landscape: a different approach to business

Four elements to commercialstrategies for OTT players

Be a complement to someoneelse’s product

Sell the customer to advertisers

Fatten up for sale

Get the customer to pay

The diversity of business modelsmakes it hard to prepare,anticipate, or compete with OTTplayers


Don’t prepare for the last war: this is a permanent,painful problem for telcos with no ‘quick-fix’ solution You can’t take out the ‘rodent’ threats because new

players will take their place

It’s hard to prepare an effective counter-offer whenthe OTT players’ offerings change so quickly – inresponse to customer demand and new technologypossibilities

The biggest threats – Google, Microsoft and Apple –already have a strong link to your customers

You can’t compete commercially with ‘Godzilla’players for whom selling communications servicesis a means to a different end – and for whom thedestruction of your main revenue source is collateraldamage, not deliberate strategy


Telco responses: five strategies

Compete

Partner

If you can’t beatthem, join them

Stave off

Wait and see


Compete

Description • Offer services that are better than OTT• Exploit OTT weaknesses – there are many• Build on assets and relationships

Examples • Joyn/RCS• “Rich voice services” – FonYou, Accession, etc• HD Voice

Advantages • Brains of all your suppliers• End to End QoS (unlike OTT)• Value of standards and interoperability• Network assets, customer data relationships, and billing

Disadvantages • Hard to compete with free• Interoperability and standards-based innovation moves

slowly compared to OTT


Partner

Description • Offer access to/from OTT services as part ofcommercial package

• Provide supporting services – peering, caching, etc• Integrate between OTT and telco services –

notifications, status messages, etcExamples • 3/Verizon/KDDI/Telcomcel and Skype

• Sprint and Google VoiceAdvantages • Out-compete peers, encourage switching

• Stimulate adoption of data services• Promote customer engagement and loyalty

Disadvantages • Educate customers in the ways of VOIP• Asymmetric commercial deals


If you can’t beat them, join them

Description • Develop your own OTT services, or buy some in• Leverage your brand and customer relationship

Examples • KT Otelle Talk• O2 Connect• Lime Talk

Advantages • Claw back some lost revenue• Muddle the market, deny scale to OTT players• Maintain skills and knowledge

Disadvantages • Cannibalise existing revenues• Educate customers in the ways of VOIP


Stave off

Description • Block or degrade• Barr in commercial T+Cs• Charge a premium• Introduce price structures (especially bundles) that

dissipate the advantages of OTT VOIPExamples • Vodafone Netherlands; most operators (?)

Advantages • Reduces revenue erosion• Delays ‘tipping point’ and knock-on consequences of

VOIPDisadvantages • Blocking is customer-unfriendly – may encourage churn,

especially if peer competitors break ranks• Technical challenges – needs DPI, and even then…• Potential for another fight with regulators in some

countries• Short term – just pushes the problem in to the future


“Wait and see”

Description • Track the impact• Evaluate technological and commercial options• No panicked response

Examples The Strategy that dares not speak its name

Advantages • Easy to define and execute• Customer-friendly, regulator-friendly• Frees resources to focus on areas of impact/benefit

Disadvantages • Hard to sell as a strategy to investors, analysts, theboard

• OTT impact is sudden and fast – may not be time torespond

• Hard to explain in the face of high impact on revenues


What happens next: some possible futures

• We have developed four alternative scenarios forthe longer-term future

• We are presenting the two most extreme caseshere


Apocalypse now OTT services keep getting better, with increasing sophistication of

contextual information (time, history, presence, location) availablefrom device sensors and cloud applications

OTT apps transform in to ‘smart social agents’ which manage users’social relationships as well as providing person to personcommunications

Users cope easily with fragmentation and new players, coalescingquickly around the most popular with occasional mass migrations

Telco services are miserable failures, always two steps behind thefunctionality of the best OTT services and unable to compete with‘free’

Access becomes a pure commodity, with users buying it either shortor long term depending on market conditions and commercialofferings

Telephone numbers follow telex addresses into near-extinction,becoming markers of low social status


The Happy Ending Operators are alerted to the OTT threat in time

They develop new attractive and compelling services thatleverage their network and customer assets

OTT services fragment and fray, undermining their attractivenessto end users who crave simplicity and straightforward inter-operability/inter-connectivity

Users abandon OTT services in favour of the more attractivetelco services

New users go straight to the better-known and better-trustedtelco services, which are better designed, easier to use, andmore integrated with other communications services

The OTT services have educated the market as to the potentialof rich media communications, but it is the telcos who reap thelong term benefit – revenues from apps as well as accessincrease, churn and SACs come down


If ‘The Happy End’ comes true…

• Prepare for continuous innovation in services, businessmodels, tariffs, user interfaces

• Invest in flexible platforms to support fast service creation

• Maintain and grow user research, competitor research,and insight programs – with a special focus on ‘weaksignals’

• Acquire new monitoring and intelligence tools to analysetraffic and revenue patterns

• Build commercial and technical frameworks for workingwith partners and developers


If ‘Apocalypse Now’ comes true…

• Re-orient the business towards delivering access profitably

• Focus engineering efforts on efficiency, cost-saving – and hencescale

• Focus commercial efforts on serving customers cheaply –especially B2B2C models

• Out–compete peers by having the best pipe and most customer-friendly commercial and technical interfaces

• Find effective ways to serve laggards who still want to buytelephony and messaging services from a telco

• Create a new narrative that avoids the words ‘dumb’ and ‘pipe’


Thank you

d1 1150 david kennedy

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