OTT and carrier partnerships: happily ever after?

One of the most surprising conclusions of Capacity’s recent groundbreaking survey of senior wholesale executives was the revelation that one in three bosses see over-the-top (OTT) players such as Google and Amazon as the biggest single opportunity in their industry.

The survey, which polled wholesale heads responsible for $65.5 billion of annual revenues, found that almost twice as many chiefs see opportunity as danger in the up-start OTT sector.

And yet, around the same time, Ovum, the London-based data firm published new analysis suggesting that internet-based chat apps such as WhatsApp and Viber now handle more messages than traditional mobile phone operators. And in a stark prediction that should have sent shockwaves through the wholesale market, the firm went on to warn that OTT apps would handle twice as many messages a day as SMS providers by the end of the year.

So how does one begin to make sense of these wildly conflicting signals?

There can be no doubting the analysis behind the latest forecasts for the messaging market: Jan Koum, chief executive of WhatsApp recently confirmed as much when he stated that his company now regularly handles 20 billion messages a day. Koum stopped short of putting a figure on the number of subscribers he has managed to lure away from the traditional mobile market. But he claimed to boast more customers than Twitter, which currently hosts around 200 million active users a month. Together with iMessage, Facebook Messenger and Blackberry Messenger, WhatsApp is on target to handle as many as 50 billion messages a day by the end of the year.

The implications for mobile operators should be grave. The SMS market is a venerable cash cow for mobile operators: Ovum reckons that the market will be worth as much as $120 billion this year alone. Such is the mark-up on a humble SMS text, which consumes a mere 128 bytes of data, that it would cost £70,000 to ping a CD over the network assuming similar charges applied. But the good times are coming to an end - and fast. The firm predicts that Koum and his peers will cost the mobile industry $86 billion a year in lost revenues by the end of the decade.

Clearly, that is revenue that the telecoms sector can ill afford to lose, not least – and here’s a bitter irony that never gets lost on wholesale chiefs, because it is under immense pressure to invest heavily in network infrastructure to ease the capacity constraints that WhatsApp and a host of other OTT players are placing on the ecosystem. If ever there were proof that network operators are never more than a single clever app away from disenfranchisement, you might very well argue, then it can be found in the seeming demise of the SMS text market.

But wait. Ovum’s research has not sparked a run on share prices– indeed, the US-based Dow Jones Telecoms Index has surged 24% since Ovum published its damning report, outperforming the wider Dow Jones Industrial Average by 400 percentage points. Neither have there been howls of anguish from trade representatives such as the GSMA. Perhaps more to the point, rumours of the death of SMS, to borrow from Mark Twain, might be greatly exaggerated. Indeed there is a school of thought that suggests the traditional mobile text could usurp the e-mail as a medium for business users. According to the Digital Market Association, for example, users are five times more likely to read a text than an e-mail while the Mobile Data Association reports that users reply to an average of one in four SMS texts, versus just one in twenty e-mails.

But more tellingly, a new mood of optimism pervades the wholesale market. And fuelling this optimism is the dawning sense that players in the OTT space, grappling with the thorny issue of how to monetise all those subscribers that they have been busy poaching from the telecoms sector, are fast realising that they need the wholesale market’s infrastructure just as much as the wholesale market needs their innovative flair.

These are the makings of a match made in heaven: while the OTT mantra is to invest in client-facing technology, the carriers come to the table with an unrivalled expertise in back-room engineering. Not only do they own the infrastructure, they know how to get the best out of it in the context of an IP setting. That can mean anything from providing specialist SMS hubs to OTT providers, to highly complex routing systems that come with service levels guaranteeing client delivery on specific routes at specific times of the day. So while the OTT sector has proved itself nigh on unbeatable when it comes to developing new apps, carriers are still unrivalled when it comes to handling traffic to or from that app.

“The reality today is that network operators are much better placed than OTT players,” says Martijn Lammers, vice president of product management at Acision. Lammers, whose company develops messaging solutions for mobile operators, does not believe that the SMS market is in terminal decline. But he does believe that carriers need to act quickly to bolster the GSMA-backed Rich Communications Service, a carrier-based rival to the OTT segment that trades under the joyn brand, if they are to give OTT rivals a run for their money. And he also sees future collaborations between carriers and OTT players as inevitable.

Christian Michaud, senior vice president of product and business development for global voice solutions at Tata Communications goes a good deal further: “We see the OTT market as a key segment for growth,” he vows. The Mumbai-based carrier, which has to date signed more than 30 strategic outsourcing partnerships (mostly among mobile virtual network operators), plans to target the OTT sector aggressively in the coming months, building on a recent initiative that it agreed with Vonage, the New York-based internet telephony company, in May. Under the terms of the five-year deal, Tata will make some of its technology available to help Vonage improve the quality of calls, as well as providing traffic management solutions and of course, access to a vast international network and a Tier-1 IP backbone that connects to PoPs in more than 240 countries.

Tata is not alone in recognising a new opportunity to woo the OTT segment.

So far this year, Facebook has signed more than 18 separate partnership agreements with network operators, mostly in emerging markets, and the company is rumoured to be close to finalising a landmark deal with a mainland operator in China.

WhatsApp, meanwhile, is understood to have partnered with more than 10 international operators including Reliance Communications in markets as far flung as Hong Kong and Chile, while Viber recently set out its stall, announcing

its  first partnership deal with Indonesia’s Axis Telekom.

Talmon Marco, the messaging service’s Israeli-born founder, has made little secret of his determination to move Viber to what he calls a “proper” business this year, generating real cold cash, and promises more partnership deals in the coming months. Marco has long argued that carriers misguidedly focus on developing inter-operable services that can work seamlessly across the entire telecoms ecosystem when they should be looking to differentiate themselves through innovation in a market that gets ever more crowded by the day.

He has a point: under the stewardship of mobile operators, the text message, which celebrates its twenty-first birthday this December, has scarcely changed. Internet-based messaging services, by comparison, continue to innovate rapidly. The latest crop of developers, for example, allow users to track conversations and check whether – and indeed when - recipients have read their message – a level of transparency that is unmatched among SMS providers.

While the current crop of partnerships might suggest that the OTT segment and telecoms operators are striving to build on what has been a sometimes-tricky courtship, it is far from clear on what commercial grounds they are based. For one thing, few OTT players have yet to work out how to monetise their own businesses, let alone hammer out a way to share that revenue with network operators. Nowhere is that frustration more apparent than at WhatsApp, which champions a staunchly anti-advertising manifesto and which is therefore left with the challenge of migrating customers who have bought into a ‘free’ app over to a paid subscription model.

The task is made all the more difficult because these apps aren’t really free, even though customers perceive them as such, because users pay for them through monthly data plans.

The pressure to start generating cash weighs heavy on the entire OTT segment and with it, an opportunity for carriers to ply their expertise: “Things are definitely moving on”, says Tata’s Michaud. “Yes we want to transport their minutes, but there’s a huge opportunity to offer much higher margin additional services such as specialised tools that can help OTT players manage their international voice traffic.” Until now, the OTT segment has been very focussed on growing apps, developing the story and making a grab for users. “Now many app providers have grown very large and they have a have a lot of challenges ahead of them,” he adds. “They are generating a lot of traffic and they need to optimise their networks.”

No two OTT players want the same thing out of a partnership with a carrier, Michaud continues. “For some, the needs centre around capacity and data centre requirements. Others are looking to better manage the explosion in off-net voice traffic that they now find themselves generating.”

One service often hailed as a way for operators to break into the OTT space, is billing. In large emerging markets such as India, where the use of credit cards is still limited, operators can bring a huge wealth of experience in billing to the table.  Nimbuzz, an Indian-based messaging app that boasts 150 million users, for example, has recently forged partnership deals with each of India’s top eight operators in order to facilitate subscriber billing with each company. The firm, which tops Facebook’s footprint in the region, maintains a dedicated team of more than 10 staff who are charged with striking new partnerships among operators from further afield.

But a carrier hoping to snag a hot start-up partner with the offer of a good billing engine is probably going to be disappointed. As the head of sales at one European carrier puts it: “I don’t think even the OTT players really know where their business models will eventually take them – at least not until more of them start to generate revenues. The best we can hope for is to hop on for the ride.”

A far more promising approach might be to tempt OTT players into partnership deals with the lure of something they know inside out: big data. As Jim Machi, vice president of product management at Dialogic explains, carriers are sitting on a vast bank of customer intelligence that they have built up over many years at the cliff face of telephony. It’s a veritable gold mine and many OTT providers might ultimately pay handsomely to pick over it. “Location is the key”, explains Machi. “Ultimately, mobile operators own the location information on all their subscribers.” They know where we are and when and that’s a crucial advantage to anyone looking for ways to monetise value added services, he suggests. “When you think about the type of information that is going to allow money to flow both ways in any partnership between the OTT sector and traditional carriers, then data on the whereabouts of customers is definitely right up there.”

Indeed, the proliferation of a vast array of big data, both among OTT providers and carriers, might eventually form the basis for potential partnership arrangements in its own right. As carriers start to refine the process of so-called “deep packet inspection”, which allows them to drill down into the guts of the network to analyse exactly how OTT traffic is affecting operations, they will increasingly generate new revenue opportunities that could well “encourage” OTT players to the negotiating table.

Freddie Kavanagh, vice president of applications solutions at Tektronix Communications explains it thus: “Many operators are now addressing the threat from the OTT sector by farming intelligence from their own networks using DPI techniques.” Deep packet inspection can clearly identify a vast array of different data, such as video, music VoIP and e-mail. It can highlight the type of application that sent a particular stream of packets, as well as the kind of device to which it is heading. Armed with such a vast array of analytics, carriers will not only be in a strong position to optimise their network services, but to hit OTT providers with new tariffs precisely where it hurts the most. Just as pertinently, DPI analytics can help a carrier determine which particular OTT services are most popular among its own customers and therefore which brands make the most sense to try to partner with.

In other words, Kavanagh says, there’s no need to reinvent the wheel: If an OTT provider has already developed a rich and engaging service, there’s little point in going head-to-head with it – especially if you ultimately control the delivery medium through which the OTT provider must reach its customers. “A far better proposition is to join forces”, he says.

The OTT market is likely to continue to prove a disruptive force to the world of wholesale – at least until it becomes more clear as to where the profits are likely to come and thus how those profits might be split with carriers. But where once wholesale chiefs were terrified of that uncertainty,  they are now encouraged by it. The enduring appeal of infrastructure, it appears, has won the day.