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Opinion Paper VoIP Goes Mobile: Blessing and Curse to Operators Or Just Another Hype? 2011/03 We make ICT strategies work

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mVoIP (mobile Voice over IP), traditionally a niche product for a small group of people, is now becoming a mass market service. It is supported by most regulators, enabled by new technologies, demanded by customers - and it has opened up a window of opportunity for new market entrants such as Apple, Google, and Facebook. This is why traditional mobile network operators (MNOs) and integrated operators may soon face their biggest challenge from mVoIP, which could significantly reduce their influence and ultimately their revenues, too.Should MNOs be resigned to their fate? We do not think so. Certainly will the customers' anticipated adoption of mVoIP lead to some substitution of MNOs' traditional voice revenues: Some users are attracted by cheaper calls, whereas other users are attracted by mVoIP's integration with new communication features such as social networking and video conferencing. However, the use of mVoIP requires the user to have Internet access, i.e. both a data plan and data coverage. Both of these conditions can only be satisfied by MNOs and here they have the opportunity of generating additional revenues to their business. Secondly, when it comes to providing the best embedded voice services, mVoIP providers could fall short. There is no reason then why MNOs should not be able to play a significant role in this field.Obviously, this requires MNOs to venture into the converging worlds of telecommunications and IT. There clearly is no sustainable alternative to this development.

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Page 1: Detecon Opinion Paper VoIP Goes Mobile: Blessing and Curse to Operators? Just Another Hype?

Opinion Paper

VoIP Goes Mobile: Blessing and Curse to Operators

Or Just Another Hype?

2011/03

We make ICT strategies work

Page 2: Detecon Opinion Paper VoIP Goes Mobile: Blessing and Curse to Operators? Just Another Hype?

The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 2 Detecon International GmbH

Table of Contents

1� Executive Summary.............................................................................................3�

2� (m)VoIP – The Point of Departure .......................................................................4�

3� The Main mVoIP Players and Future Potentials..................................................6�

4� The Threat to Telcos .........................................................................................11�

5� Observed Reaction Patterns of Telcos..............................................................14�

6� Option Space for Telcos ....................................................................................16�

7� Play out, Change, or Waste Away.....................................................................18�

8� The Authors .......................................................................................................19�

9� The Company ....................................................................................................20�

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 3 Detecon International GmbH

1 Executive Summary

mVoIP (mobile Voice over IP), traditionally a niche product for a small group of people, is now becoming a mass market service. It is supported by most regulators, enabled by new technologies, demanded by customers – and it has opened up a window of opportunity for new market entrants such as Apple, Google, and Facebook. This is why traditional mobile network operators (MNOs) and integrated operators may soon face their biggest challenge from mVoIP, which could significantly reduce their influence and ultimately their revenues, too.

Should MNOs be resigned to their fate? We do not think so. Certainly will the customers' anticipated adoption of mVoIP lead to some substitution of MNOs' traditional voice revenues: Some users are attracted by cheaper calls, whereas other users are attracted by mVoIP’s integration with new communication features such as social networking and video conferencing. However, the use of mVoIP requires the user to have Internet access, i.e. both a data plan and data coverage. Both of these conditions can only be satisfied by MNOs and here they have the opportunity of generating additional revenues to their business. Secondly, when it comes to providing the best embedded voice services, mVoIP providers could fall short. There is no reason then why MNOs should not be able to play a significant role in this field.

Obviously, this requires MNOs to venture into the converging worlds of telecommunications and IT. There clearly is no sustainable alternative to this development.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 4 Detecon International GmbH

2 (m)VoIP – The Point of Departure

Let us take a condensed look at fixed VoIP from the end user’s perspective. So, when sitting in front of your computer and using a landline, the accelerators and brakes for VoIP are the following:

VoIP advantages

Cost savings: VoIP-based calls are free of charge within a VoIP provider’s community. This allows “free” calls – data access being the only priced prerequisite. In international calls, where charges are typically highest, VoIP is most attractive. Out-of-community calls, however, usually get charged but are still often much cheaper than regular phone services.

Varied features: Call forwarding, call waiting, voicemail, caller ID, conference calls, video calls, instant messaging, and file transfer are some of the many traits included with IP telephony at no extra charge. Since you are using a computer and have Internet access, you can use all kinds of services prior to the call (e.g. check your friends’ presence via Facebook) and during the call (e.g. browse the same document as the person you are talking to).

Easy portability: Location-independency enables the user to make VoIP calls wherever there is a broadband connection simply by signing into the VoIP account. This characteristic makes VoIP as user friendly as e-mail, for example.

VoIP disadvantages

Imperfect substitution: Regular phones are kept in service by the current supplied through the phone line, but VoIP on a desktop PC stands still when the power is off (e.g. during a blackout). Also, when it comes to emergency calls, only regular circuit-switched calls can be traced.

Unsteady quality and reliability: Data sent across the Internet usually arrives at its destination quite scrambled. Reassembling occurs once all data has arrived. The duration for this procedure depends largely on the network traffic. This is an issue for real-time and high-quality voice over data.

Limited convenience: OTT VoIP, like Skype, is confined to computers, thus limiting the scope for spontaneous calls because an Internet-connected computer is required, the VoIP application has to be running and the user must be sitting in front of it, typically with a headset, too.

However, despite all the drawbacks, the pros seem to outweigh the cons in many occasions. The very fact that month after month about 124 million people connect through Skype1– the market leader amongst all OTT VoIP providers – serves as proof of VoIP’s attraction1.

1 about.skype.com

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 5 Detecon International GmbH

Smartphones: the perfect (mobile) VoIP terminals

Current mobile “smartphones” are a near-perfect platform for VoIP: They combine Internet access, computing power to operate several programs in parallel, and a display large enough to display all kinds of content. Hence, they eliminate many of the hassles and imperfections associated with making VoIP calls over the computer or the fixed line.

Apple is one of the players to have developed a user-friendly mobile VoIP application:

� Placing VoIP calls via 3G: On May 30th, 2010 Skype enabled VoIP calls on the iPhone via 3G, allowing free Skype-to-Skype calls and international calls at reduced rates, bypassing the MNO.

� Receive VoIP calls while using other apps: Multitasking makes it possible to receive Skype calls while other apps are running, even when the iPhone is locked.

New

3Gincoming &

outgoing calls

Before

Wi-Fi OnlyPractical only for

outgoing calls

New

3Gincoming &

outgoing calls

Before

Wi-Fi OnlyPractical only for

outgoing calls

Considering these recent developments, it is conceivable that VoIP providers will find further ways to integrate their services even more smoothly in the future.

In brief, the users can expect three key advantages of mobile VoIP over the traditional mobile call:

� Cost: Users can benefit from the Internet cost structure in terms of lower (international) calling costs.

� Convenience: It is possible to use several, enriched services (e.g. shared calendars, phonebooks) and other services that help to make or receive a call to or from the right person at the right time. Users have easy access to choose the one of many channels for communicating (instant messaging, e-mail, SMS, voice).

� Community: Users can benefit from the integration of social network platforms by always being synchronized with their friends and business contacts.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 6 Detecon International GmbH

3 The Main mVoIP Players and Future Potentials

Current landscape

Currently, the mVoIP provider ecosystem is unquestionably dominated by Skype, which has over 560 million registered accounts and carried 95 billion minutes of voice traffic in the first half of 20102. Aside from Skype, there are a few midsize players, such as Fring, Nimbuzz, and Mig33, who offer similar mVoIP services and compete either through appealing to a specific region (e.g. Nimbuzz in the Netherlands) or by offering special features (e.g. Mig33). Finally, there are the small scale providers, many of whom do not provide true mVoIP service but rather just low cost international calling using virtual numbers. This landscape is modeled in Figure 1.

Figure 1

Recently, aside from these providers who are directly involved in offering mVoIP services, other Internet service companies such as Google, Yahoo, and Facebook, are increasingly moving towards offering voice communication as a value-added service to complement their main service offerings. Given their size and influence, these players have the potential to change the mVoIP landscape significantly in the next few years.

Skype: The market leader

Skype, founded in 2003 in Luxembourg, is the undisputed leader of the mVoIP industry. As of Q3 2010, an average of 124 million users connect through Skype each month3 and it is on

2 Skype IPO Filing (http://sec.gov/Archives/edgar/data/1498209/000119312510182561/ds1.htm) 3 Ibid.�

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 7 Detecon International GmbH

track to earning over $800 million in revenue in 20104. The revenue is based largely on paid calls. The company’s growth since 2005 is illustrated in Figure 25.

Figure 2

Major contributors to Skype’s astronomical growth in the last seven years since its founding are the inherent strengths that the company brings to the table. One of the differentiators of Skype from other VoIP providers is its proprietary VoIP network, which is based on a peer-to-peer model rather than a client-server model. This model allows Skype to keep costs low while also scaling up capacity at the same time, enabling the company to maintain low prices for calls. Additionally, the Skype protocol is very effective at traversing firewalls or other security systems so that the client will work for almost all users without the users having to manually adjust complicated network configurations. Another advantage that Skype possesses is its high quality SILK audio codec, which can capture any sounds with frequencies between 50 Hz and 12,000 Hz6. As a comparison, traditional circuit switched voice systems capture frequencies between 400 Hz and 3,400 Hz. Additionally, the SILK codec was designed to use very little bandwidth, which is ideal for capacity-strained mobile networks. Finally, the most important asset for Skype is its huge user base. At over 50 million active users, the sheer network effect prevents any other VoIP network from gaining traction and cements Skype’s dominance of the market.

Skype has introduced a number of disruptive measures in the last few months. One of the most significant is its partnership with Facebook, in which Skype users can use Facebook Connect to instantly call, text, IM, or video chat with Facebook contacts. This serves to significantly increase Skype’s network effects by making even more of each user’s contacts available through the Skype client. Although no Skype services were integrated into Facebook as a result of this partnership, this development allows Skype to stave off competition from other networks and puts Skype into the position of a partner for Facebook rather than a competitor.

4�Techcrunch (http://techcrunch.com/2010/10/04/skype-new-ceo/)5 Ebay Annual Reports 2006-20096 Skype Developer Website (http://developer.skype.com/silk)��

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 8 Detecon International GmbH

Another significant disruptive move is Skype’s new SkypeKit Beta program, which allows developers to program Skype features onto any connected consumer electronics device or integrate them into any software environment. First off, this creates a new revenue stream for Skype since the company will charge a nominal membership fee to have access to SkypeKit and fees for testing and certification. More importantly, releasing this development tool will enable Skype to quickly and cost-effectively expand its presence to the next generation of connected devices.

Last, but not least, Skype was able to allow 3G VoIP calling on its iPhone application. This, combined with support for multitasking on iOS 4, has made Skype into a much more powerful mobile VoIP application for the world’s best selling smartphone. A brief timeline of Skype’s history and some of its strategic moves through the years is shown in Figure 3.

Figure 3

In the near future, Skype’s main focus will be on acquiring more enterprise business. Towards that end, it has hired Tony Bates, a former SVP of enterprise products for Cisco, as CEO. The company has also introduced and expanded the functionality of many of its enterprise-oriented products. For example, Skype has partnered with Avaya to offer Skype Connect, which allows employees to make low cost domestic and international VoIP calls through a desk phone rather than a PC. In addition, its new Skype Channel Partner Program allows its partners to sell IT services for Skype products. Other enterprise products, such as call center applications and distance learning solutions, are also rumored to be in development7. With sufficient growth in the enterprise segment, Skype could be on track to surpass $1 billion in revenue by the end of 20118.

7 Techcrunch (http://techcrunch.com/2010/10/16/skypes-vp-of-enterprise-on-future-strategy-products-and-competitors/)8 Ibid.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 9 Detecon International GmbH

Google: The unexpected upstart

For eleven years since its founding, Google has never been considered a communications company. However, with the acquisition of GrandCentral and the subsequent introduction of Google Voice, Google has unreservedly stepped into the role of a communications provider. With the integration of true VoIP technology and the ability to make free calls to any number in the U.S. and Canada, Google has also convincingly thrown its hat into the ring of VoIP competitors. A brief timeline of Google’s communications activities is highlighted in Figure 4.

Figure 4

Aside from many of the innovative features that Google Voice offers, Google can also leverage many of its inherent strengths to unseat Skype as the leader of the VoIP market. The most important advantages it has are simply its size and revenue stream. Google earns almost 40 times what Skype earns in revenues each year and it does so mostly through advertising and not through VoIP. This means that Google can invest much more into its VoIP service and offer such services at a lower cost or even free of charge, since VoIP is just a small portion of Google’s business that can be used to drive business to its other segments. For example, Google Voice offers free calls and SMS to any landline or mobile number in the U.S. and Canada, an offer which Skype cannot match due to its reliance on paid calling for almost all its revenue.

The other advantages Google has are the network effects and customer contacts through its Gmail service and Android OS. In the first 24 hours since the Google calling service was launched on Gmail, over one million calls were made9, potentially indicating a willingness of Gmail users to switch from Skype to Google Voice as their main VoIP client Additionally, this service can be deeply integrated with Android such that all Android phones will offer Google’s calling service, which would create a massive “preload effect” given that an average of 200,000 Android phones were being activated per day in Q3 201010.

9 Official Google Blog (http://googleblog.blogspot.com/2010/08/call-phones-from-gmail.html) 10 Techcrunch (http://techcrunch.com/2010/08/04/android-activations/)

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 10 Detecon International GmbH

Without a doubt, Google will continue to innovate around its mobile VoIP offering in order to own the market. The most significant move would be to integrate Google Voice into their network if their rumored “Google Me” social network becomes successful. In late 2010, Google acquired several social networking companies (Angstro, SocialDeck, Like.com, Jambool and Slide), all of which could be integrated to create a credible Facebook competitor. If this is successful and a sizeable (500 million+) number of people join, then a Google Voice program centered around social networking contacts will have a network effect similar to that of Skype/Facebook. Together with the free calls that Google Voice offers on desktop PCs to the mobile app, Google Voice would become an incredibly competitive mobile VoIP offering.

In addition to this move, Google in general has been moving towards the enterprise space with its Google Enterprise product offerings. This service already includes Google’s calendar, document programs, e-mail, and collaboration software, so integrating a VoIP solution would not be a far-fetched move. Google Voice will definitely need to be improved in terms of call quality and security in order to become a real enterprise product, but once these issues are resolved Google will also be a genuine threat not only to Skype’s enterprise ambitions, but also to all players in the enterprise telephony market.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 11 Detecon International GmbH

4 The Threat to Telcos

Summary

The threat of mobile VoIP to mobile operators consists of three major advantages that mVoIP providers will have over traditional telco voice. The most critical advantage is simply the fact that mVoIP calls can be free of charge while circuit-switched voice cannot. The introduction and growth of Google Voice and Skype’s tie-in with Facebook are indicating that the market may indeed be quickly moving toward such a reality. The second advantage of mVoIP is its integration into social media. In the near future, contacts will be centered more and more around social networks rather than phone numbers, meaning that people will be using applications such as Facebook or LinkedIn to contact someone rather than using phone numbers. The recent partnership between Skype and Facebook may be an early step in this direction and it is likely that Google will also implement a social network in which calling will be featured. Finally, mVoIP applications often provide additional features beyond calling, such as video chat, file sharing, collaboration tools, SMS, chat, and more. Traditional telco voice is unable to match such a feature set and therefore this is the third advantage that mVoIP applications will have over telco voice. A summary of these advantages are shown in Figure 5.

Figure 5

Calling Costs

Although it is a common perception that mobile VoIP is always cheaper than traditional voice, the truth is that for a majority of regular calling, traditional voice actually enjoys a significant cost advantage. As an example, a Skype user in Germany would need to pay at least 20 Euros for a tariff plan including data (plus any associated mVoIP fees) just to be able to access Skype. Furthermore, then she or he would need to pay about 25 cents per minute to Skype for making a domestic call to a mobile number in Germany.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 12 Detecon International GmbH

Therefore, the total cost for using just 100 minutes of mobile calling will be 37.50 Euros (30 voice minutes are included in the plan). By contrast, a pure mobile voice plan including 100 all-net minutes costs about 25 Euros per month11. Additionally, many telcos are introducing international mobile calling plans with unlimited calling to most of the major countries in the world for a low rate per month, bringing even the cost of international calling down to levels comparable to mVoIP providers. In this way, the telco has a significant advantage in providing mobile telephony just based on the cost to complete those calls.

The real threat for telco voice from mobile VoIP providers is the free calling that is often offered between users of the same VoIP network. Although currently there is not yet a critical mass of mobile Skype users who substitute much of their regular calls with Skype-to-Skype free calling, this can obviously change in the near future. With recent announcements such as the Skype/Facebook partnership and Google’s free calling in the U.S. and Canada, substitution of regular telco calling for free calling can conceivably increase substantially in the next few years. In such a reality, the user will only need a data plan and will either forego a voice/texting plan or get the smallest plan required, reducing ARPU for MNOs significantly.

Social Media Integration and Features

One reason why the Skype/Facebook partnership is potentially a huge disruptive move is the shift that it represents from communication centered around phone numbers to communication centered around social networks. This trend is being accelerated first by the growth of social networks, second, by the growth in consumers’ willingness to communicate through these social networks, and third, by the limitations of communication around phone numbers. These limitations include the lack of control over who can call them, being tied to a single device instead of to a person, and limited functionality. The growth for social networks and their importance in communication is highlighted in Figure 612,13.

Figure 6

11�Calculation based on exemplary T-Mobile Germany tariff plans as per Feb 2011 ( “call&surf XS” vs. “call S”, handset included).12�Business Insights. The Social Networking Market Opportunity (April 2010) 13 Universal McCann Wave 4 (July 2009)

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 13 Detecon International GmbH

In contrast to a phone number, mVoIP through a social network identity allows people to control who can contact them, is tied very closely to a person, and can allow for a variety of IP communication services such as VoIP, video chat, and file sharing. Skype on mobile is able to offer instant messaging, text messaging, and presence information while Fring offers all that as an aggregation service for multiple IM clients but also offers 3G video chatting. As a result it will be very difficult for traditional telco voice to compete on features. Consequently, telco voice and text messaging revenues could suffer as the number of substitution using mVoIP clients increases and customers purchase lower cost voice and texting packages. However, an increased use of mobile VoIP could also lead to an increase in data revenues, which could be a way for this new calling phenomenon to become beneficial to operators.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 14 Detecon International GmbH

5 Observed Reaction Patterns of Telcos

Telcos in Europe and the U.S. show quite heterogeneous reaction patterns in dealing with mVoIP. Reasons are diverse, however, they can be reduced to two common factors.

First of all, reactions depend highly on the particular intensity of mVoIP usage per market. This level of maturity correlates with factors such as smartphone penetration, mobile broadband coverage, and the availability of dedicated mobile data services. In markets where these indicators are still below a certain threshold, telcos often disregard mVoIP as a threat. They prefer to wait until the usage of mVoIP reaches the point where traditional call revenues are seriously at risk.

The second factor is the strong correlation between the competitive market environment and the telcos’ market position among its peers. Incumbents show a tendency to defend traditional voice revenues by adopting conservative mVoIP measures, whereas more agile attackers are inclined to adopt more non-traditional strategies. For example, they try to attract competitors’ customers by offering more modern propositions such as a Skype partnership (e.g. 3UK).

In accordance with both factors, the market maturity and the competitive environment, multinational telcos seldom show a uniform approach across all their foreign subsidiaries.

Vodafone: In Germany, mVoIP is blocked in general except for subscribers of the high-priced tariff(s) ‘InternetPlus (Flat)’, whereas in the UK, OTT VoIP and other P2P services are allowed, but only for unrestricted data or voice price plans. Additionally, in January 2010, the UK subsidiary signed an MVNO partnership with the mVoIP provider Truphone.

Orange: Only metered plans allow mVoIP in the UK, whereas mVoIP usage is generally allowed as of June 2010 in Poland.

O2: Higher-value tariffs allow mVoIP but only for the German market. This is quite contrary to the approach in the UK where mVoIP is totally banned for consumers. Besides that, O2 UK already started its first trial in April 2010 and also launched an mVoIP service based on Jajah, a VoIP provider which was acquired by Telefonica at the end of 2009.

Deutsche Telekom: T-Mobile allows mVoIP services in Germany but charges a monthly tariff for this usage. In the UK, mVoIP works only with the web’n’walk Max plan. On the other hand, mVoIP is explicitly not allowed at T-Mobile Netherlands.

3 “Three”: In the UK, ‘Skype on Three’ allows Skype-to-Skype calls and chats for free originated on Three’s 3G network. Furthermore, they offer the ‘3 Skypephone’, which is a series of 3G mobile phones manufactured with 3 as a partner. Hutchison 3G Austria offers the ‘INQ’ device which has pre-installed Skype, Facebook, Windows Live Messenger, and Twitter. Tariff ‘MoreSkype’ allows Skype-mVoIP calls on several types of handsets for a monthly charge.

Verizon: Since March 2010, ‘Skype Mobile’, the exclusive Skype-on-Verizon deal, brought Skype to Verizon Wireless customers who are owners of BlackBerry and Android-based smartphones.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

Opinion Paper 15 Detecon International GmbH

From these response types, a framework for determining appropriate strategies for telcos to deal with mVoIP emerges.

Seen as a strict countermeasure, telcos could block mVoIP traffic on their mobile networks completely to prohibit any substitution of their traditional voice business. This option is not necessarily a freely chosen strategy but can rather be attributed to regulations within a country, such as with some markets in the Middle East.

“Doing nothing”, which means allowing mVoIP without counteracting is another way of dealing with this topic, at least in theory. However, from a realistic point of view, this option should only be considered once the revenue at risk is calculated as negligible. But sometimes exactly the opposite is the case: Ignoring mVoIP is occasionally just an oversight.

However, “embracing mVoIP”, which is a strategy that is pushed by regulators rather than telcos, requires more creativity on the part of the telco. Market analyses have shown that most of these measures involve adoption of terms and conditions, launch of dedicated tariffs for mVoIP and implementation of traffic management or something similar.

Bold moves, which comprise the most active option, contain products or services adopting at least certain mVoIP characteristics. Offering fully developed mVoIP applications can also be taken into consideration, either as an in-house development or via a partnering model with an mVoIP provider.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

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6 Option Space for Telcos

Within the mobile industry, we found three typical perspectives on the impact of mVoIP. First, there are those who assume that mVoIP is going to have no significant impact on their industry at all. As shown above, mVoIP bears many benefits to end users and to those who make it an integral part of their offerings, making the rise of mVoIP applications almost certain. Time and intensity of impact will vary by country and operator; however, and even in markets that seem to have less favorable conditions for mVoIP adoption, we suggest that telcos closely watch the key market factors and mVoIP usage on their own network.

Then, there is the split between those who focus on the risk that mVoIP presents – and those who see opportunities. These players can be known as the conservatives and the renovators.

The conservatives are mainly established companies with medium to high market shares. Their primary concern is how to manage the risk of revenue loss, arising through a significant number of users substituting current “traditional” voice usage by third party mVoIP services, which will first significantly impact international call revenues.

For instance in Egypt, where mVoIP has been banned by the government, it is arguable whether this is motivated by economic reasons in favor of local operators or by political reasons. UAE, a country with an extremely high proportion of foreign inhabitants, granted licenses for the offer of VoIP only to local telco companies, thus keeping out competition by providers of low-cost international calls such as Skype. Still, in most countries, we assume that regulators will tend not to restrict the use of mVoIP. Therefore, simply banning such services will not be a sustainable position.

So, if telcos cannot prevent this revenue loss, how can they control the damage? Allowing and enabling the use of mVoIP will in many cases require additional effort on the network. These may and should be charged to those who use these services. Assuming a growth of the mVoIP user base, a potential mVoIP surcharge would surely decline over time. For operational implementation, it is critical to start change of terms and conditions early. Otherwise, customers might be inclined to cancel their contract.

Telcos should use their pricing options to retain usage and revenues: Many operators already offer special international calling packages. Often, the target group for these packages lack awareness of these products, so assuring that they are attractive, promoting them to international callers might already be a first step to prevent substitution and win back potential mVoIP users. Attractive on-net charges, friends & family style options, and the like are further options to reduce the cost advantage of mVoIP services.

Most of the above mentioned response options focus on rather reactive moves within the current business model to limit mVoIP impact by contractual or by pricing approaches.

Renovators might be inclined to try more daring moves: One would be to go and launch a service similar to Skype’s offering and to compete directly in order to retain market share. This model might become more attractive as it would also allow to acquire customers that currently are beyond the telco’s reach. We are skeptical, though, as it requires quite an investment to launch this service successfully and to make it well known.

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It also generates low ARPU, at least if it relies on break-out calls to generate the revenues. Unless you already have access to a well-known brand, or the approach matches your current brand, we do not think that this model can turn out positive on its own.

Another option – instead of focusing on cost – is to apply mVoIP’s advantages of integrating it into social networks and other features. We are convinced that over time, voice will be just one of many ways to communicate. Integrating social network services, e.g. presence services, allowing easy integration of various contact lists, and an interface that feeds personal and social news, can provide additional value to the users. In the future, the real value for users will not be to call somebody, but to know when and where somebody is – which is what we call the “context”. Before, communication depended on the right context being given. In the future, the context becomes both, cause and content, of the communication. If operators do not create their own solutions here, they will carelessly give away a key value to their “over-the-top” competitors.

Renovators, people with the need and will to focus on innovation and growth, might be tempted to ally with specific OTT players. However, they should be aware that this will most probably be a rather short-lived exclusiveness, as the partner will strive for further growth beyond typical network operator market shares. The limited time for partnering then needs to be used as effectively as possible.

Here, network operators can play a unique role. In our opinion, they can play the “OTT game on the OTT”. This means building bridges, sometimes even integrating the different ecosystems that we see emerging, by implementing own applications. As a benefit to their original customers, network operators should seek ways to release them from the prison of specific ecosystems and provide choice to their customers.

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The Disruptive Potential of mVoIP – Or Just Another Hype?

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7 Play out, Change, or Waste Away

We urgently recommend you examine your local market conditions and understand how current and foreseeable future disruptive moves by Apple, Facebook and Co. might impact you. This will help you to understand when and how your customers might churn or substitute your services with mVoIP.

The key question will be to identify if, on the demand side, market changes will be rather driven by:

� arbitrage potential or

� value creation by new features.

We are convinced that mVoIP, owing to its potential to create new functional value, will supersede traditional voice calls in the long-term.

Until then, pricing measures will allow you to fend off competition to a certain amount. Following this path will allow you to develop and launch services that create new, superior value relying on choice and/or integration of different ecosystems.

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8 The Authors

Clemens Aumann is Managing Consultant in the Strategy & Marketing department. His work concentrates on national and international projects in marketing and innovation management for the ICT industry.

Nathan Cao is a Business Analyst in the San Francisco office of Detecon Americas and works within the Strategy and Innovation group based in that office. His projects mostly deal with new mobile services, online content strategies and emerging technology strategy. Some topics he is interested in include gaming content strategies, mobile payments and mobile advertising.

Rouven Hertenstein is a Senior Consultant at Detecon’s Practice Strategy & Marketing since October 2007. He has a wide range of international project experiences in T.I.M.E. markets with a focus on Germany, USA, China, Middle East, Southeastern Europe, and Southern Africa. In his work he concentrates on the areas of strategic business innovation and new media.

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9 The Company

We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high level of technology expertise.

Our company's history is proof of this: Detecon International is the product of the merger of the management and IT consulting company Diebold, founded in 1954, and the telecommunications consultancy Detecon, founded in 1977. Our services focus on consulting and implementation solutions which are derived from the use of information and communications technology (ICT). All around the globe, clients from virtually all industries profit from our holistic know-how in questions of strategy and organizational design and in the use of state-of-the-art technologies.

Detecon’s know-how bundles the knowledge from the successful conclusion of management and ICT projects in more than 160 countries. We are represented globally by subsidiaries, affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the business customer brand of Deutsche Telekom. In our capacity as consultants, we are able to benefit from the infrastructure of a global player spanning our planet.

Know-how and Do-how

The rapid development of information and telecommunications technologies has an increasingly decisive influence on the strategies of companies as well as on the processes within an organization. The subsequent complex adaptations affect business models and corporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting as well as the planning and implementation of highly complex, technological ICT architectures and applications. We are independent of manufacturers and obligated solely to our clients’ success.

Detecon International GmbH Oberkasseler Str. 2

53227 Bonn Telephone: +49 228 700 0 E-Mail: [email protected]

Internet: www.detecon.com