The onslaught of OTT and the way forward for Mobile Operators

Recent data published by TRAI indicates that India has a total mobile subscriber base close to 900 million (Oct 2013 data) out of which 60% are urban subscribers and the rest 40% rural. While the rural teledensity is only around 40% the urban teledensity is close to 140%. And we are adding between 2 to 3 million subscribers per month in either area.

On a related note smartphone penetration is around 67 million (2013 end) and is expected to reach 120 million by 2015, the annual growth has been around 52% despite a depreciating rupee making such devices expensive. However this represents only 7.5% of the mobile subscribers. Comparively China has a smartphone penetration of 350 million which is 21% of the mobile subscribers in that country and is showing a YoY growth of 31% [All data ref. Mary Meeker, partner at Kleiner Perkins Caufield & Byers (KPCB)]. India is thus one of the fastest growing markets for smartphones ans may continue to be so in the next 4-5 years (Canalsys, IDC).

Figures published by TRAI indicate rural market (expect less smartphone/tablet sales here) as having growth potential, while that published by KPCB show the urban matket as focus area for smartphones. It worthwhile noting that most traffic in rural market is voice (where both ARPU and margins are extremely low) whereas "data" will show explosive growth in urban segments. Data ofcourse is more resource intensive on the network and therefore this is where Operators have to focus on as urban market has short term potential of increased ARPU as well as profitability.

Based on the above market scene, their are two fundamental trends sweeping the Industry:

(1) Demand for Mobile & Fixed Broadband Connectivity driven by the explosive growth of smartphones and Tablets

(2) The rise and rise of OTT services which are having a profound impact on the services based revenue model of mobile operators

Traditionally, the killer service that telcos offered was a simple 2-party voice call, a business that catered to probably more than 95% of subscribers spanning consumer and enterprise domains. It was the backbone of operator revenue streams. Another service that was vastly successful and profitable was the use of SMS. Compared to voice, it consumed less network resources, was used more and became highly profitable. In essence the business model of telcos was to sell such bundled services. At the same time ISPs emerged in fixed wireline networks domain, which sold fixed bandwidth agnostic of applications. The more speed, data limit (including the hated FUP limits on unlimited plans) and reliability (I must add this because their is no point in taking an FBB connection which is down half a month) was what mattered to consumer. Their was no loyalty to service provider, only to the service. the fatter the pipe, the lower the latency, the more glitch free it was, the more it sold.

First, the increased competition (due to MNP, more players, improving infrastructure etc) impacted both of these business models in a similar fashion. It drove down call, sms and data plan tariffs. That means lower ARPUs. ARPU/CAPEX-investment ratio went down as operators had to invest more money to upgrade equipment/network while at the same time try to entice customers (who were a small fraction of overall subscribers) by throwing the cost bait. 

Second, consumer behavior wrt to what he uses his data plan for is changed drastically. What was originally casual browsing and web mail (in 2G or GSM/EDGE era) has now expanded to cover a host of services like Video streaming (YouTube, Netflix, Hulu), Social Networking (Facebook, twitter, Google+), Content Creation and Uploads (video/text/image blogging), VoIP (skype, viber, text+, etc) and Instant Messaging (WhatsApp, Facebook messenger, hangouts, Tango, Line, Kik+, etc). Many of these services are FREE and this is the biggest motivation for subscribers to jump on to them. These services initially started to serve fixed broadband customers, but the increasing ubiquity of mobile broadband and smartphones/tablets created a use-case on mobile devices. The increasing resolution/quality of such IT services is putting tremendous stress on the capacity planning of mobile networks. YoY the traffic is increasing many folds. WhatsApp is the global leader in a couple of years time in Messaging. If whatsapp were to offer Voice Services, it could overnight eat a huge chunk out of the carrier voice business. Skype is already the world leader in International calling worldwide (by minutes carried).

So to summarize we can say that for the operators revenues from bundled services (including mobile internet data access) are declining YoY while the bandwidth (and latency) requirements are increasing forcing them to upgrade network capacity frequently to keep up with the demand. So how does one find the business case and required CAPEX finances moving ahead ?

Apart from "fatter-pipe" demand which is inevitable, and is pushing mobile operators to an ISP kind of business, it is fundamentally threatening to convert the pre-existing Mobile operator business model of selling bundled voice and VAS, into an unbundled business model of bandwidth (pipe) and services. The bandwidth can come from one service provider while the services from another. An operator like china mobile which is the world's leading mobile operator by subscriber size (500 million) can be simply dwarfed by the user community of Facebook, WhatsApp and Google in a couple of years time, if not already. And china mobile dwarfs every other Indian mobile operator by many folds. This IMO is the disruptive business trend.

While 3GPP and Mobile industry has answers to the pipe (LTE, LTE-Advanced) on the technology front, there are no clear answers to the Over-the-Top (OTT) services problem. Mobile broadband has clearly improved latency and bandwidth. While IMS has the ability to let telcos build Multimedia and Rich Communication Services themselves for their networks, its adoption has lagged behind far too long (as any new development in ITU-T/3GPP/ETSI driven industry is ...). Today even if the network resources are opened up, it is unlikely as to why a community of developers would be keen to develop applications on top of individual operator's network assets and even if they do, can beat the fast moving OTT players from the Internet who already have massive subscribers (users) for their ever improving & innovative services. The service is global, access is local.

In my opinion the unbundling is the right trend as it allows agressive innovation independently in both the data and services plane. The previous network architecture was constrained in this respect. Sooner or later telcos have to accept this reality (and lobby to loosen the regulatory presire with governments) to create a more net-neutral Mobile Internet. they have to sell bandwidth to users and somehow work in collaboration with OTT players to improve delivery and QoE of their services and charge them accordingly (revenue-sharing). They can also increase the network usage efficiency by these applications to save OPEX (something the OTT player may not care aggressively about as he is used t a free pipe model). They have to develop the B2B focus and shrink the B2C focus. If a viable business case cannot be made out of the co-operation between mobile network operator & OTT service provider, the mobile operators have to resign themselves to being the pipe provider.

Users are smart. If they want to use skype or Whatsapp they will. It is free. If they can't do effectively (or at all) or cost-effectively on mobile networks, they will try to use their WiFi connections to jump on the nearest indoor (residential, office or commercial space) fixed broadband connection and use the services AFAP and only in the most urgent cases use the Mobile Broadband network or Mobile Operator's services. I have seen many so many users in India who don't use 3G (even though their phone/tablet supports it) or switch the 3G phone to 2G by default, switch of their mobile data always & try to use WiFi AFAP and only in very rare cases try to switch on mobile data or 3G/HSPA. This behavior is a technology, mobility & ubiquity anti-pattern. It is a loss-loss situation for both the operator & subscriber. It is not the direction in which the industry or the subscriber should be headed. This is one reason I am not bullish at all on IMS beacuse I feel its a technology too late for the times. If LTE and IMS would have been deployed 10-15 years back, maybe things could have been different. IMS holds promise for future but OTT services are a viable reality today.