– 1 – We make ICT strategies work

Tim Dörflinger 17.02.2015

The OTT butterfly effect – Small companies and apps with big influence

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Our lives are constantly reshaped by innovation, in the Telco sector the trend

setters are now the OTT players

The OTT Butterfly and its effect on the Telco Universe

The flap of the OTT butterfly’s wings today can set of a hurricane in the telco industry tomorrow threatening the very existence of traditional telco operators in the near future.

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Introduction: The OTT butterfly effect

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In chaos theory, the butterfly effect is the sensitive dependence on initial conditions

A small change in one state of a deterministic nonlinear system can result in large differences in a later state.

The name of the effect, coined by Edward Lorenz, is derived from the metaphorical example of the details of a hurricane (exact time of formation, exact path taken) being influenced by minor perturbations (e.g. the flapping of the wings of a distant butterfly several weeks earlier.

The butterfly effect metaphor can be adapted to the Telco universe , where small and flexible OTT players create changes in market conditions today, that can have a hurricane effect on Telco operators in the near future.

Trends and challenges: The current regulatory imbalance

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First Release 12/2010

Founded 1997

First Release 2009

2014 Subscriber numbers: ~ 280 Mil. global users

Revenues: Not disclosed

Employees: Not disclosed

2014 Subscriber numbers: +50 Mil. Global users

Revenues: US$4.37 billion (2013)

Employees: 2,000 full-time (2013)

2014 Subscriber numbers: ~ 600 Mil. global users

Revenues: Not disclosed

Employees: 55 full-time (2013)

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The road ahead……

Introduction: The drivers for fixed and mobile data growth

Innovation in the field of ICT products and services is significantly changing human communication behavior and drives data usage on both fixed and mobile networks.

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The drivers for fixed and mobile data growth Selected quantified data drivers

+4%

2019

8.506

1.782

4.383

2.341

2013

6.657

4.531

1.919 207

<3G 3G 4G / LTE

+1.029%

+128%

-69%

Mobile Subscribers (in Million)

97 341

159

2019

365

25

+6%

2013

256

Regular TVs Smart TVs

TV Device Sales (in Million)

+721%

-86%

Source: IC Intelligence Centre (2013) - TV Devices Forecasts Source: Ovum (2014) - Mobile Subscription and Revenue Forecast Source: Ovum (2013) - Global Cellular M2M Connections Source: Strategy Analytics (2013) - VoLTE, OTT Voice & Video Call Forecasts

199

494

2013 2019

+16%

M2M Connections (in Million)

+% Compound Annual Growth Rate (CAGR)

185

2013 2019

1.636

+44%

Active Videocall* Accounts (in Million)

* e.g. Skype and Facetime

Introduction: The operator profitability trap

OTT players evolve into the service providers of the future at the expense of Telco operators and push them into a severe data transport, revenue and profitability trap.

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The Internet is evolving into an imbalanced media distribution platform (increasing downloads and stagnating uploads)

Data traffic is growing exponentially and significant network investments are needed to meet the future demand

The needed investments can not (yet) be recovered by data revenues and traditional voice revenues continue to shrink

In addition, OTT players re-shuffle the market balance by focusing on the content offering, rather than on the traffic

Operator profit margins significantly decrease over time and require innovative solutions to address these challenges

Revenue development in relation to traffic growth The Telco operator profitability trap

The key challenges for Telco operators

2010 2012 2014 2016 2018 2020 2022 2024 2026

30,000

25,000

20,000

15,000

10,000

5,000

0

CAPEX + Depreciation OPEX Revenues

Shrinking margins

EBIT negative

EBITDA negative

Unit: Million US $

Source: Analysis Mason (2014) - Fixed network data traffic worldwide Source: Strategy Analytics (2014) - Wireless Operator Performance Benchmarking Q1 2014

813.409

266.669

2016 2013

328.551 157.850

1.654.872

2019

450.509

Mobile Network Traffic MNO Data revenues

Fixed Network Traffic

25.000

10.000

400.000

15.000

5.000

20.000

0

450.000

50.000 0

250.000

100.000

200.000

350.000 300.000

150.000 20.217

17.744

376.360

2016 2019

403.231

2013

432.019

15.574

Mobile Voice Minutes (global)

Mobile Voice Revenues (global)

Minutes: Billion units Revenue: Million US $

Traffic: in Petabyte Revenue: Million US $

Trends and challenges: The rise of OTT players

The number of OTT players that offer fully “location-independent” innovative services is constantly growing, attracting millions of subscribers with on a global scale.

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OTT Landscape - Overview of the most dominant OTT players

Source: Detecon Research 2014

Trends and challenges: The rationale for OTT growth

OTT players are expected to surpass established Telcos in the long run by claiming the majority of revenues from services that are built on top of the operator’s infrastructure.

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The forecasted absolute growth rates highlight the changing relationship between traditional vs. future services

OTT service revenues explode as:

Services with a large customer base move from free to “fremium” or subscription based models

OTTs expand and focus their services on mobile platforms, as the mobile penetration rates rise and usage behavior evolves

The data analytics and business intelligence tools evolve, increasing advertisement funding

This revenue explosion is built on the back of network operators, leaving them with network expansion costs to accommodate the data growth

Operators will face severe profitability challenges in the future

Development of global Telco and OTT services market (2010 – 2021) The rationale for OTT growth

2021 (e)

753 702

2020 (e)

526

675

2019 (e)

368

649

2018 (e)

257

624

2017 (e)

180

600

2016(e)

158

580

2015

137

560

2014

117

540

2013

94

519

+53%

74

497

2011

58

2012 2010

41

458

+1.720%

476

OTT Services Market Telco Services Market

Source: IDATE - World Internet Services Markets 12/2013 and Detecon Forecast (e)

Unit: Billion US $

Trends and challenges: The impact of revenue squeezers

Voice, Messaging and Video OTTs can be seen as profit squeezers, their services do not only impact traditional Telco revenues but pressure the network infrastructure.

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Video / TV Services Voice and Messaging Services Profit Squeezers

OTTs offering competing services

with free(mium) business models or

high capacity demanding services

Greatly harming operator traditional revenue streams or resulting in heavy

infrastructure investment to support QoS on OTT service

Source: Ovum 11/13 Consumer VoIP Forecast Source: Ovum 09/13 Mobile Messaging Traffic and Revenues Forecast

Mobile messaging

~ 49,0,6 bn US $ in SMS revenues lost to OTT players in 2014 (globally)

Video is expected to contribute the single largest portion of mobile data traffic, at over 70% by 2016”

Trends and challenges: The potential of revenue generators

Several OTTs can be identified as revenue creators, as their digital business evolve and services get pushed into the market generating revenue streams unknown to operators.

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Cloud, Games and Music Services Social and e-Commerce Services Revenue Creators

OTTs offering innovative services

with compelling business models

based on Business Intelligence data

Most of business models are driven by

advertisement revenues built on the

basis of customer profile knowledge

Source: Detecon Research 2014

Regulatory Challenge: Deregulation vs. Regulation of OTT?

Trends and challenges: The current regulatory imbalance

As a new regulatory balance is not yet in sight, operators need to act quickly on their own to cater for these challenges and develop adequate OTT response strategies.

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Growing Imbalance between Telecom and OTT universe

Limited/ no regulation (No service license required, interconnection not mandated)

Internet based standards (IETF) Rapid growth Low, scalable investment Limited direct employment IP based

Disruptive models (free, freemium, ad based etc)

OTT| Communication Universe

Heavily regulated industry (e.g. SLAs are included in the service license)

Telco based standards (ITU) Limited/ slowing growth High pre-investment required Significant employer Moving towards IP

Traditional business models Subject to national tax regime Usually subject to universal service

obligation

Telecom Universe

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Operators find themselves at a cross roads and need to take a strategic decision…

Trends and challenges: Operators at the crossroads

Operators need to carefully decide how to deal with OTT players as their different types of business models may determine the sustainable future of operators business.

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OTTs’ business models develop at a fast pace and change the traditional revenue split

Advertisement is the main revenue source of many OTTs.

Paid subscriptions start to work for larger customer base OTTs

Fremium apps have thrived as a innovative monetization strategy

Cloud storage as an add-on service has ramped profitability

Business Intelligence is the most powerful tool of content distributors

Best-effort free services cannibalize traditional revenues

Flexibility and innovation are the only way operators can monetize on future opportunities

Operators face a crossroad regarding OTT impact on their business OTT Business Models

Service deployment over time

Prof

itabi

lity

leve

l ove

r tim

e

OTT Business Model Refinement & Maturity

Strategic decision needed

OTT Perspective Operator Perspective

Voice and Messaging

High Bandwidth Video

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What can operators do about it?

Solution: Operator response strategies

In principle, Telco operators can choose between three strategic directives to mitigate the impact of OTT players on their core business: Defend, Attack and Co-Operate.

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Overview of the most common response strategies for Telco operators

Product / Service Partnerships

Block OTT Services

Neutralize OTT Effects

Do Nothing (Zero – Option)

1 Defense Strategy

Attack Strategy

Emulate OTT Services

Co-operate Strategy

Acquire OTT Players

“Sponsored Data” Approach

2 3

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OTT Impact Case Studies

Cooperate Strategy – Vodafone Qatar

OTT Mobile Video

Vodafone Qatar has partnered with ‘Go by OSN’ to give customers access to a large selection of movies and series

The service is currently available on PC’s and Macs, Smartphones and tablets and subscribers can take advantage of dual-device screening

Vodafone is expecting to drive the update of its recently launched LTE service through this value proposition

Selected Case Studies: Overview

The following case studies were chosen to assess the impact of OTTs on African Telco operators and derive region specific strategies for operators based on current trends.

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OTT Messaging

Partnership between OTT messaging player WhatsApp and Airtel Nigeria

Exclusive WhatsApp-branded mobile data plan from Airtel to compensate SMS revenue loss and increase brand perception

The partnership has been extended regionally to other Airtel Markets (e.g. India) and to include other OTT platforms such as Twitter and Facebook

OTT Video, Gaming, Music

MTN creates the content platform MTN Play to reduce usage of OTT content and increase brand perception

Subscribers get mobile access to content such as games, news wallpapers, ringtones, music, and videos

MTN Play is now available to MTN subscribers in 22 Markets in Africa and the Middle East

Attack Strategy – MTN play Cooperate Strategy – Airtel Nigeria

South Africa

Nigeria

Qatar

Case Study I – MTN Play

MTN Play is a digital platform developed and operated by MTN which offers subscribers a variety of OTT content which they can access on multiple devices.

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MTN Play was launched in 2009 in South Africa and expanded to other MTN markets

MTN Play is currently offered in 21 out of the 22 countries in which MTN it has mobile operations

MTN subscribers can access content which includes music, sports, news and information , applications, games, entertainment, social networking, as well as various streaming services (e.g. Mobile DVB-T)

The content offered on MTN play is platform-independent and tailored to each MTN market with options such as local soccer team updates and local music available

Background Using MTN Play

A range of mobile handsets and operating systems, (basic feature phones to smartphones and tablets) is catered for by MTN Play

The option of either subscribing to content or purchasing once off is possible

There is flexibility of cost to the subscriber as there are a variety of services to choose from

Both prepaid and postpaid customers can use the service

MTN Mobile Money, e-vouchers, loyalty points or airtime can be used to purchase content

User downloads application / access via the internet

User subscribes to content / purchases

once off

Billing via deduction of

airtime balance, voucher, mobile

money etc.

Source: Detecon Research 2014

Case Study II – Airtel Nigeria and WhatsApp

With the expected uptake of OTT voice and messaging users in Nigeria, SMS traffic on Airtel’s mobile network as well as SMS ARPUs are expected to decrease.

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Source: Analysys Mason OTT worldwide forecasts 2013, * Detecon Forecast for years 2014 – 2017

Nigerian OTT Voice and Messaging users (millions)

25

5

0

10

15

20

2011

+43%

2017 2016 2015 2014 2013 2012

Voice Messaging

Development of SMS Traffic on Airtel Nigeria Network

1156121712811348141914501435

0

500

1000

1500

2014 2013 2012 2011 2016 2015 2017

-4% SMS Traffic in Million

OTT Users in Million

Selected quantified data drivers

1638 1670 1704 173816061402

5,395,505,615,725,845,91

0

500

1000

1500

2000

0

2

4

6

-2%

2017 2016 2015 2014 2013 2012 2011

Voic

e Se

rvic

es

238 286 343

2,60

1,83

0,32

0

100

200

300

400

0

1

2

3 +52%

2017 2016 2015

1,29

2014

0,91

198

2013

0,64 165

2012

83

2011 Da

ta S

ervi

ces

76 77 79 817468

0,250,250,260,260,270,27

0

50

100

0.0

0.3

0.1

0.2

-2%

2017 2016 2015 2014 2013 2012 2011

SMS

Serv

ices

ARPU in US $

Revenue in Mio. US $

ARPU in US $

Revenue in Mio. US $

ARPU in US $

Revenue in Mio. US $

Source: Strategy Analytics 2014, * Detecon Forecast for years 2014 – 2017

n/a

n/a

n/a

Case Study II – Airtel Nigeria and WhatsApp

By partnering with WhatsApp, Airtel intends to reduce the negative revenue impact of OTT messaging by monetizing WhatsApp usage through specific tariff plans.

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Airtel Nigeria’s partnership with WhatsApp Inc. offers all Airtel prepaid subscribers a WhatsApp branded data plan that provides unlimited access to WhatsApp usage for a monthly subscription fee

This partnership is a first in Nigeria and is currently exclusive to Airtel

Subscribers who activate Airtel data bundles of 200MB or more (up to 15 GB per month) also get unlimited access to WhatsApp messaging without having to pay for WhatsApp usage via deduction of airtime

All core WhatsApp features are included in the bundle:

Instant messaging and Multi-user messaging

File sharing

Location sharing

Message broadcasting

Audio messaging

Airtel also provides a WTF (Whatsapp, Twitter and Facebook) bundle that offers unlimited access to all three OTT platforms

Airtel Nigeria and WhatsApp partnership Airtel Nigeria “WhatsApp” and “WTF” bundle tariffs

Monthly subscription fee for Airtel WhatsApp bundle is: 100 Nigerian Naira (0.62 US $)

Monthly subscription plan for 200MB, which includes unlimited WhatsApp usage, (i.e. Usage is not taken off data volume) is: 1,000 Nigerian Naira (6.14 US $)

Monthly subscription fee for Airtel WTF bundle is: 200 Nigerian Naira (1.23 US $)

For WhatsApp activity after expiration of bundle subscription, Airtel customers will be billed based at “Pay as you use” rates of 5kobo (0.003 US $) per Kilobyte

Source: Detecon Research 2014

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Key Take-Aways

Key Take-Aways

The current developments in the OTT market increase the pressure on operators. There is only a short window of opportunity to develop the right response strategy.

The Operator Profitability Trap

The Rise of OTT Players

A Regulatory Imbalance Remains

Definition of a Response Strategy

Learning from best practices

Global Data Usage Growth

2

3

4

5

6

1 Innovation in the field of ICT products and services is significantly changing human communication behavior and drives data usage on both fixed and mobile networks, a challenge all Telco operators have to deal with.

Global data traffic has exceeded voice traffic by far but the generated revenues can not (yet) cover the required network investments as OTT players claim an increasing amount of traditional Telco revenues for themselves.

The globally growing number of OTT players with innovative business models is putting increasing pressure on Telco operators. The market for OTT services is expected to surpass the “traditional” Telco services market by the year 2021.

As a new regulatory balance is not yet in sight, operators need to act quickly on their own to cater for these challenges and develop adequate OTT response strategies.

There is only a short window of opportunity for operators to elaborate a specific response strategy before their performance is significantly impacted by OTTs. Operators can choose between a Defend, Attack or a Cooperate Strategy.

By carefully analyzing the strategies chosen by other operators around the globe, operators can draw upon best practices and benchmarks to support their decision making.

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We make ICT strategies work

Thank you for your attention!

Questions, comments and discussion?