Carriers and OTT providers: friends or foes?

It’s a love-hate relationship and that’s the best way I can describe it,” says Justin McAleer, head of strategy at TeliaSonera International Carrier.

He is of course referring to the tension that often exists between carriers and over-the-top (OTT) providers as their two worlds become increasingly forced together.

On the one hand, websites such as YouTube, Facebook and Skype have helped drive unprecedented volumes of traffic to carriers’ networks. In fact, between 2008 and 2010, TeliaSonera says it experienced a compound annual growth rate (CAGR) of 60-70% of traffic on its backbone, with this figure only continuing to grow.

The flipside is that carriers are required to make larger investments to maintain or upgrade existing networks and ensure for quality of service (QoS) in order to keep up with the extreme traffic growth. And they are struggling to find a return on that investment.

McAleer says TeliaSonera’s average return on capital employed between 2008 and 2010, yielded 3 to 5%. Comparatively, he claims some OTT players yielded 50-60% on the same ratio.

“The fact is carriers are making massive investments in capital to provide a communication platform which these OTT players are using to provide their services. The difference is they are extracting good returns of the services they provide, while the carriers are not. Whether it’s Facebook’s advertising-based model, or Netflix’s subscription-based model, it’s all healthy return – none of which we see.”

TeliaSonera’s point is clear: if you want to use our infrastructure to deliver your services, you should be paying for it.

The OTT players, however, argue that they are not in the market to compete with the operators, but rather complement existing services. Skype’s Linda Summers, director of marketing and operations for the mobile business unit, believes that many operators still regard OTT services as a threat to their traditional business model.

“Skype is not a replacement and they must understand this,” she says. “Skype actually serves as an opportunity for mobile operators to capitalise on growing demand for such a service and extend it into the mobile environment.” She even claims that carrier business models should evolve to take advantage of the consumer demand for data.

Since the evolution of Google, Yahoo!, Skype and Facebook, there has been a widespread perception that carriers have been reluctant to move with the times. However, one of the largest Tier 1 carriers in the world, Tata Communications, says it has been continually identifying new opportunities in the market brought about by the emergence of OTT players.

In particular, Allan Chan, president of global carrier solutions at Tata, believes there is huge opportunity for carriers in the service delivery of OTT applications: “There is a clear opportunity for carriers like us to look at different business models that focus less on service delivery, and more on value-added capabilities to ensure such applications, including content delivery, are being delivered with the right experience.”

Level 3 Communications was another early mover. In the latter part of the 2000s, many US and European operators were content to merely watch the returns flood in from the high growth mobile market. Level 3, meanwhile, acquired the CDN division of Savvis for $135 million in 2006, and began differentiating its last mile access network to ensure it could cope with advancements in areas such as video and gaming.

According to Mark Taylor, VP, media and IP services at Level 3, the plan was to develop last mile delivery access networks by introducing a CDN on the access side. Rather than serve as a commercial entity, the CDN would be built on the network to serve content over the top, which the OTT players would then pay a premium for to increase the quality of their service.

“Looking at the bandwidth and compute costs, placing that CDN on your network serves as the operator’s eyeballs and it is the best way of cashing in on this service space economically.” Taylor claims that many operators missed a trick by not enhancing existing networks before the OTT players made it big.

“Between 2004 and 2005 our focus revolved around video delivery and the economics behind providing the access to that particular technology,” he says. “We found it was a hard business to get into on the technology side but we succeeded. Others companies, like AT&T and TeliaSonera, have tried and failed in a sense. I would say it’s never too late, but it would be very difficult to compete with companies like us, Limelight and Akamai, to deliver the vast amount of traffic required effectively.”

Taylor recognises, however, that while carriers still hold the underlying infrastructure, they remain the essential link in providing connectivity to the end user. He feels they are unlikely to relinquish this position “even if an OTT audaciously attempted to acquire a

global network”.

While major Tier 1 carriers are protected by their global coverage, smaller operators could find themselves under threat. Taylor says networks that address content streams are required to be accessed globally – and as content sharing, streaming and accessibility to data grows this will become ever more important.

Could interconnection agreements be the solution for carriers? No, says Taylor, because “unlike the voice market where nothing changed for years, the dynamic nature of the technology in the OTT market should not be underestimated”.

Changing streaming protocols and digital rights management capabilities are two of many reasons why 50 global carriers, for example, would find it impossible to interconnect. Adding these features to existing services while involving so many interconnected carriers would prove almost impossible.

Back in the nineties, the internet was a safe haven for operators and service providers. The ecosystem allowed for per minute and per megabyte fees for international and domestic voice calls, or broadband and fixed-line access to the internet, resulting in incremental returns for the infrastructure provider.

Skype’s Summers claims there are now on average 250 million monthly connected users to the VoIP platform. “New business models need to evolve and replace the old where VoIP was not part of the plan,” she says.

Research firm Ovum doubts whether carriers form part of a VoIP provider’s plan. A recent report assessing changes in the international wholesale voice market by Ovum suggests that by 2016 the vast majority of international voice traffic will be mobile originated.

This can be largely attributed to the rapidly increasing uptake of mobile connections in emerging markets such as Africa, Asia and Latin America. According to Ovum’s David James, it can also be attributed to “OTT VoIP service providers hungrily eyeing this traffic growth as an opportunity to increase their market share through bypassing the established international carriers”.

The investment made by larger carriers in converting legacy networks towards next-generation IP-based infrastructure has been substantial, but if OTTs like Skype and Google Talk market their services as free or extremely low cost, it can only serve as a direct attack on traditional international voice wholesale.

James points out that such OTT activity is “cutting out the need to pay for international transit and termination separately, and if VoIP grows to dominate the international retail voice market, it could disappear altogether because no-one will be prepared to pay for it”.

Tata’s Chan says the line between OTT provider and communication service provider is becoming increasingly blurred. “OTT players are behaving more like communication providers and tapping into our business increasingly. They possibly pose a threat to our entire business model,” he adds.

The traditional voice market has been steadily declining for years, and the emergence of VoIP services has been at the forefront of the carrier mindset for some time now. One region that has been commended by the industry for its progress in video content and integration of the OTT players within the wider telecoms ecosystem is the Middle East.

Although the market still presents steeper regulatory challenges compared to Europe and the US, there is an increasing drive in countries like Saudi Arabia and Qatar to ensure Arabic content forms part of an integrated solution that ties together the content aggregators and the operators.

Qtel’s Navneet Singh, head of global capacity and carrier services at the company believes the threat posed by OTT in his market is still very minimal. “Qtel has taken a bit more of an open view compared to other operators,” he says.

“As technology moves towards more of a data platform, carriers need to look at it in terms of how much usage is on the network. Through value-added applications from OTT services, time spent using the networks has doubled. We need to develop applications that can generate revenue as a result, and ensure our infrastructure runs across fibre.”

Singh also points to the continuing problems Blackberry maker Research in Motion (RIM) is facing as an example of operators getting tougher with the OTT players. “Revenue sharing and closer alignment is essential. Infrastructure like 4G and FTTX cannot just be expected.”

Getting tough is one approach, but another is to play the OTTs at their own game. In early July, UK broadcaster Sky TV, which offers a bundled broadband and TV service package, launched a paid OTT service for its movies package. This meant that for the first time its customers would not be tied in to lengthy contracts or monthly subscription fees but could instead pay for Sky movies on demand.

It positioned the UK broadcasting giant in direct competition with OTT video streaming entities like Netflix and Lovefilm, which have been successfully tapping into the high penetration of fixed broadband in households to distribute content.

Analysts were quick to suggest that Sky was conceding its paid subscription model was simply not working anymore. However, Stephen Sale, principal analyst at Analysys Mason, believes it is actually an indication that the pay-TV market in the UK had reached full saturation and Sky was using its existing capabilities to innovate a service that was now popular.

He says operators can do the same thing in order to manage the decline of voice and messaging, which accounts for almost 70% of total revenues. “Historically, an operator’s approach to pricing was simply based on a reaction to what their competitors were doing,” he says.

Operators, he continues, will need to compete head on with OTT services, such as WhatsApp, Skype and Viber, using their own capabilities and expertise through service integration and feature application.

The move to LTE will give operators a vantage point in the face of present low cost infrastructure required to run services like WhatsApp and could even see them switch off old networks before allowing OTTs access to next-generation LTE.

Facebook’s deal with TeliaSonera could prove an early indicator of how the relationship between OTT and telecoms operator will evolve in the short-term future. The Scandinavian carrier is building a pan-European managed optical network for the social media giant, with internet exchange points in multiple cities.

McAleer says the move accepts that offering innovative services, catering to consumer trends, and feeding the demand coming from the recalcitrant ‘followers’ of innovative social media belongs in the hands of the Twitters, Facebooks and Googles of the world. But managing the underlying network and controlling the optical layer of the network is the carrier’s “bread and butter”.

“Because such a product is so highly commoditised, the present IP transit model simply is not working as it is not generating a return on invested capital. This deal with Facebook allows us to provide a managed capacity service that we feel represents a strong business model for us. Our infrastructure then delivers that content directly to the retail ISP who delivers it to the end customer – this is purely a commercial deal.”

McAleer hints that if revenue sharing and an increased integration with the OTT players is not addressed, both parties stand to lose out. “Carriers will start to look rigorously at how capital is deployed if they continue to be in the red and this will mean a scale back of investment in certain parts of the network.”

A compromise of quality as a result is certainly not what the end users want, let alone the presently untouchable OTT.

Google’s decision to integrate its PageSpeed front-end optimisation technology within Edgecast’s CDN network “is an indication of the OTT showing goodwill to operators”, says James Segil, president and co-founder at Edgecast Networks.

PageSpeed serves as a platform for CDN providers to improve web user experience while packaging rich media content in a more manageable way for carriers to deal with.

The integration between Edgecast and Google, announced at the end of June, is designed to make speed improvements to both static and dynamic content on the web. EdgeCast is the first CDN company to integrate the technology within its global network, and is an indication of how OTT players can develop technologies like this to integrate within a network to improve consumer QoS.

Segil says Google PageSpeed was an innovative product built by the company’s engineers. They “were just waiting for someone like us to do something with it”. He says: “While it may not be recognised, companies like Google integrating products like this within a CDN like Edgecast means we are doing all we can to reduce the burden on the carrier.”

By deploying Google’s innovative solution into Edgecast’s global CDN network, it allows the CDN player to balance the traffic that flows through the internet. This content is then condensed into a more efficient package, reducing the burden placed on the carrier network, in addition to enabling faster internet usage. “The service aims to attack the traffic at different levels and address the ever-present OTT problem to aid the carrier,” adds Segil.

PageSpeed is part of Google’s “make the web faster” project that commits to investment in ensuring web performance improves and the entire ecosystem works together as a community. In a recent blog post, the OTT internet powerhouse identifies upgrades to internet protocols, browser usage improvements and its influence behind the FCC’s decision to open white space spectrum to the internet community as major steps towards further developments.

Segil places the CDN providers in the same bracket as the OTT providers, and claims there should be a universal commitment between internet companies in particular to aid the carrier. “Whether it’s Facebook, Google, Yahoo!, Edgecast or Akamai, from a carrier perspective we are all in the internet business and we are all content aggregators,” he says. “We all connect to their network and we have massive amounts of traffic that end users are demanding. We have to work with carriers to ensure this content gets to the end user.”

And while the overriding perception in the market continues to be of one where the OTT is painted as the villain, Segil claims OTT players are constantly looking to partner with carriers to help bear the load of traffic.

“OTT’s have a peering policy which is directed at partnering with the carrier to dump traffic. In fact, everybody has a programme in place where we can embed technology on the carrier network. Page-optimisation technology, as an example, is designed to improve end user experience and align OTTs more closely with the carriers. It should be embraced.”