Legacy Voice vs. OTT Voice

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1 Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators DETECON CONSULTING

2 Abstract The continuous decline in revenues from legacy mobile voice services and the common understanding that free OTT voice services are the root cause for this development is a widely spread theme in our industry. In 2016, the global mobile revenues for data services exceeded the revenues for voice services for the first time ever. The patterns of the mobile voice revenue decline vary globally, impacting mobile operators to a different degree. As a consequence, mobile telecom operators have to take a closer look at their voice strategies for preventing future net revenue losses. Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators 1

3 Decline of revenues from legacy voice service is inevitable in all markets Voice as a telecommunication service undergoes dramatic changes. Considering that legacy mobile voice minutes are shifting to VoIP minutes at fast pace, the global mobile voice traffic is still increasing. Thus, voice remains an important service offering from the customer perspective. However, from the operator perspective it loses its importance at the same time due to severe loss of revenues as shown in Illustration 1. Voice is shriveling from being THE main service of mobile network operators to a VAS. The decline of revenues from legacy voice service is inevitable in all markets. Over time and depending on the particular market conditions such revenues will either disappear or become negligible. To respond to this development operators need to take well prepared actions to migrate today s legacy voice revenues into tomorrow s data revenues. At the same time operators are also required to monetize their investments into legacy voice services and to extend the lifetime of their legacy voice through directed innovation. A prolonged lifetime of legacy voice will not only secure respective revenues but also grant the time necessary for operators to prepare the revenue shift towards data. Illustration 1: Global Mobile Voice & Data Revenues; Source: Detecon, Pyramid One of the main drivers for the shift of legacy voice minutes towards VoIP minutes is the appearance of OTT service providers. Their applications such as WhatsApp, Facebook (FB) messenger, Line, Viber, etc. quickly became popular on a global level. These applications initially offered pure text messaging options which led to vanishing revenues for SMS, the cash cow of telecom operators for many years. Next to additional features, i.e. sharing of photos or locations, voice became just another communication channel, which was integrated into these applications. As with messaging services, OTT voice was and is offered for free, they can, however, only be used within the respective application. These services are often walled gardens without gateways to third parties, however, they work across any country border and on any smartphone, providing the end user with a high potential of cost savings. Operators however, struggled to find answers and the right strategy to the appearance of OTT messaging in the past, the same applies to OTT voice: Do operators have answers and the right strategy to the OTT voice threat? Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators 2

4 Operators lack clear OTT voice strategies Although perceived as an old topic, many operators still lack straight forward solutions and approaches to the challenges of OTT voice players. Instead of driving the market, the majority of the operators are reacting to OTT trends without having clear strategies of how to deal with the impact of OTT voice services on their business. They quickly feel pressured, but they are often not able to qualify and quantify the impact and risks, while opportunities are overlooked in the process. The development of a fitting OTT voice strategy highly depends on the situation of the respective market as well as multiple factors with regard to the operator itself. Operators have to consider their own position and the maturity of their voice products. Being an incumbent operator might implicate regulatory restrictions, while the attackers in the market have more and/or other options to maneuver. The impact on the business of pure MNOs might be different than on the business of integrated operators. Furthermore, operators who already migrated their products from voice to data centricity only face a limited threat to their revenues. The market maturity as such also plays an important role to derive the right conclusions and to develop solutions. The market saturation is an important indicator operators have to consider while concluding and deciding on an OTT voice strategy. If the market is still increasing in the sense of increasing subscriber numbers, it is worth to understand the potential of these subscribers in terms of ARPU and thus, the type of voice services they will use. In this context the question about available and used devices has to be discussed. The migration from featured phones to smartphones is at different stages for every country and probably every operator (MNOs vs. MVNOs). Smartphones are a prerequisite for the use of OTT voice applications. Thus, the smartphone penetration is another important indicator, since it shows the readiness for OTT voice from market and subscribers perspective. In addition, the market factors it is important that operators consider technology aspects and the impact on their networks. The technology to produce voice as a service is changing from circuit switched (TDM voice) to packet switched (VoIP). In the course of the development of services requiring high bandwidth and generating huge traffic (e.g. through video streaming services), voice becomes a negligible service in terms of network dimensioning. In other words: Not only the voice revenues become negligible, but also the importance of voice traffic for the network. Management decisions regarding legacy networks required for a service not generating enough revenues should be well balanced and a main concern for operators. OTT voice strategies of mobile operators are diverse There is no one fits all OTT voice strategy for mobile operators, since each market and all operators are individual. Operators have to develop an OTT strategy model, which is based on five strategic pillars as depicted in Illustration 2. While the first two pillars rather focus on options to further monetize existing voice offerings, operators have to prepare their business for the future, which is subject of the pillars three, four and five. Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators 3

5 Illustration 2: Strategic Pillars of OTT Voice Strategy; Source: Detecon 1. Strategic Pillar #1: Be the Leader in Legacy Voice Being the leader in legacy voice means to dominate the voice market either directly with own voice offerings measured against quality, simplicity and price or indirectly via the wholesale market. Critically challenging own voice offerings enables operators to understand their market position and to derive the right strategic decisions. 2. Strategic Pillar #2: Innovate Legacy Voice Features and Offerings Innovating legacy voice is not only necessary against the backdrop of the voice offerings of competitors, but also against the set of features offered by OTT voice players and how customers perceive OTT voice services. The positive message is that legacy voice offerings can be innovated not only by available features, instead they have certain advantages over OTT voice offerings. However, both the innovation and the advantages of the legacy voice services have to be communicated. 3. Strategic Pillar #3: Embrace the OTT Voice Trend While mobile operators were the attackers for the past 25 years, now OTT players have emerged and have been taking over the role as serious, potentially disruptive attackers. OTT voice in itself is not a threat for mobile operators. In fact, OTT voice and the myriads of other services available over the Internet drive the need for superior mobile data networks and therefore present a paramount opportunity to boost data revenues in order to compensate declining legacy voice revenues. 4. Strategic Pillar #4: Learn from Others OTT players are part of the telecommunication landscape for several years now. Acting globally, they are changing the market environment dramatically, giving all existing stakeholders huge challenges mobile operators as well as regulatory bodies. Mobile operators worldwide, but also OTT players themselves gained certain experience and created success stories. The knowledge from best practice examples will help to define the right strategy to deal with OTT players. Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators 4

6 5. Strategic Pillar #4: Embed the OTT voice strategy in an OTT partnering strategy The OTT voice strategy has to be embedded in an overall OTT partnering strategy considering other services like social media, gaming, video, etc. as well. To compensate revenue losses operators need to launch these new and innovative services. Innovations are mainly driven by OTT players, but the relevance and need for partnering is increasing for both, since OTT players on the other hand are searching for the right partner with regard to customer potential, network coverage, quality and reliability, providing operators the opportunity to diversify and broaden their portfolio. Key challenges for operators The first key challenge is most commonly the fact, that operators have insufficient data which is required to analyze their position within the voice market and to define firm OTT voice strategies. Operators need to monitor their own voice markets and services as well as international developments very closely. State-of-the-art analytics and big data technologies will provide the means for such monitoring needs and to allow for the necessary deep insights into legacy and OTT voice usage patterns of customers. Operators likely will have to adjust their reporting and, if necessary, their IT systems according to the ongoing development in the market. The second key challenge results from the circumstance that operators have to predict the future rather precisely in order to correctly understand and define the right balance as well as the right timing the Tipping Point for both strategic directions. Operators will have to find answers to the questions: When does legacy voice reach its peak?, When do we start to migrate from legacy to OTT voice? and How do we migrate from legacy to OTT voice?, in order to define the right measures and to consider the time necessary to implement these measures. The third key challenge is to convince the operator s own staff, who are end users themselves of the OTT voice strategy. The migration from legacy to OTT voice impacts a big part of the organization and the management should ensure the support for the migration within the organization, since it is a must for a successful implementation. The current development requires a change of mind on all levels of the organization. Operators openly have to discuss the question How to change our mindset? to successfully cooperate with the newcomers in the market and in order to benefit from the ongoing changes. Why Detecon? Our proposed Hybrid Operator Strategy Model offers operators an elaborated tool to develop their own, tailor-made strategy to tackle legacy and OTT voice services together. We developed an end-to-end and in-depth methodology and derived measures covering all five strategic pillars. Knowing the latest OTT trends and developments provides you with detailed market insights and enables us to be at the forefront of all innovation and changes of the industry. Working with Detecon means discussing the topic with our industry experts at eye-level but also benefiting from the OTT partnering know-how of our mother company Deutsche Telekom AG the leader in European telecommunications. Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators 5

7 Legacy Voice vs. OTT Voice A Hybrid Strategy Model for Mobile Operators Your contact persons Thomas Wehr is the Managing Director of Detecon Asia-Pacific Ltd. and a member of the International Executive Board of Detecon International GmbH. Thomas joined Detecon back in 2004 after starting his professional career with the Federation of German Industries (BDI) where he advised businesses in entering European markets. His area of expertise covers a wide range of topics in Regulation, Strategy Development & Implementation, Finance & Controlling, and Marketing & Sales. He advises numerous clients in all segments of the Telecoms value chain within and across Asia Thomas.Wehr@detecon.com Ronald Conrad started his career at Detecon in 2005, after graduating in Communications Engineering. After multiple project assignments in Europe, South-East Asia and Africa in which he gained expertise in Wholesale & Regulation, Technology, Strategy Development and Marketing & Sales, he became the Regional Director for Central Asia. He successfully consults regulatory bodies and supports operators in post-soviet countries in the definition of corporate and functional strategies as well as in optimizing their organization and business processes Ronald.Conrad@detecon.com Thomas Kessler is the Head of Business Development at Detecon Asia-Pacific Ltd. He has been working for Detecon since 2005, after being a lecturer at the Institute of Communications at the University of Rostock and working for Cisco Systems in the US. Thomas is well known for his technology and management expertise and is trusted by clients throughout Southeast Asia. In the past years, he successfully accompanied clients in the rollout of nationwide fixed and mobile networks and supported incumbent operators in their turnaround management to reclaim market leadership Thomas.Kessler@detecon.com Detecon Consulting Global Knowledge Community Strategy, Innovation & Partnering