Operator strategies to address the OTT threat

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1 Operator strategies to counter the OTT threat MENA Summit 2013: Enabling innovation, driving profitability Operator strategies to address the OTT threat 6 November 2013 Stephen Sale EVENT PARTNERS:

2 Operator strategies to counter the OTT threat 2 Changing business models in communication services Operator responses to the OTT threat Outlook for the MENA region

3 Retail/distribution Operator strategies to counter the OTT threat Players from across the mobile value chain are moving into communication services 3 Hardware OS Content and applications Network connectivity Operator services as defaults in the native dialler

4 Retail/distribution Operator strategies to counter the OTT threat Players from across the mobile value chain are moving into communication services 4 Hardware OS Content and applications Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler

alternative native features 5 Hardware OS Content and applications Network

5 Retail/distribution Operator strategies to counter the OTT threat Players from across the mobile value chain are moving into communication services Handsets offer alternative native features 5 Hardware OS Content and applications Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler

6 Retail/distribution Operator strategies to counter the OTT threat Players from across the mobile value chain are moving into communication services Handsets offer alternative native features increasingly presented as default 6 Hardware OS Content and applications Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler

7 Retail/distribution Operator strategies to counter the OTT threat Players from across the mobile value chain are moving into communication services Handsets offer alternative native features increasingly presented as default 7 Hardware OS Content and applications Tighter integration forthcoming? Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler

Extending with Facebook Home Features SMS handling in Android Chat heads avatars in other apps VoIP (in some countries)

8 Operator strategies to counter the OTT threat 8 Case study: Facebook Overview Facebook Messenger and Home screenshots Standalone messaging app launched in 2011 Improving access by dropping Facebook login and partnering with operators Extending with Facebook Home Features SMS handling in Android Chat heads avatars in other apps VoIP (in some countries) Installed base 874 million mobile MAUs (no Messenger figures available) Rating Messenger: 4.5* (Android), 4* (ios); Home: 2.5* (Android)

9 Operator strategies to counter the OTT threat 9 Case study: Google Overview Google Hangouts and KitKat screenshots Google Hangouts now focus for disparate comms initiatives, including Google Voice; expanding numbering Integrated more closely with Android 4.4; Hangouts replaces Messages icon Features Group chat features; emoticons Location and picture sharing SMS and MMS integration with Hangouts Installed base 540 million MAUs for Google+ (300 million in-stream ) Rating 3.5* (Android), 2* (ios)

revenue from stickers in Aug 2013 Features Group chat and calling; emoticons Location and media sharing New

10 Operator strategies to counter the OTT threat 10 Case study: Line Overview Line screenshots Leading social messaging app Expanding aggressively from domestic base in Japan Rival social gaming platform USD10 million revenue from stickers in Aug 2013 Features Group chat and calling; emoticons Location and media sharing New Timeline and Home page Installed base 260 million registered users (Sep 2013) Rating 4* (Android), 3.5* (ios)

Operator strategies to counter the OTT threat 11 Case study: WhatsApp Overview WhatsApp Messenger screenshot First cross-platform app to easily integrate address book 27 billion

11 Operator strategies to counter the OTT threat 11 Case study: WhatsApp Overview WhatsApp Messenger screenshot First cross-platform app to easily integrate address book 27 billion messages per day No ads: first year free, then USD0.99 Features Group chat features Media sharing Audio messaging Installed base 350 million MAUs (Sep 13) Rating 4.5* (Android), 4* (ios)

12 Operator strategies to counter the OTT threat 12 Operator feature sets look increasingly weak against alternative services driven by new business models Communication services business models Player Core business Feature set Voice Messaging Video Location Social Comms business model Hardware Indirect Advertising Indirect Advertising Indirect Software licensing Moving to indirect Communication services Direct Content distribution Indirect MNOs Communication services Direct

13 Operator strategies to counter the OTT threat 13 Operator feature sets look increasingly weak against alternative services driven by new business models Communication services business models Player Core business Feature set Voice Messaging Video Location Social Comms business model Hardware Indirect Advertising Indirect Advertising Indirect Software licensing Moving to indirect Communication services Direct Content distribution Indirect MNOs Communication services Value of communication services increasingly co-opted Direct

14 Operator strategies to counter the OTT threat 14 Operator feature sets look increasingly weak against alternative services driven by new business models Communication services business models Player Core business Feature set Voice Messaging Video Location Social Comms business model Hardware Indirect Advertising Indirect Advertising Indirect Software licensing Moving to indirect Communication services Direct Content distribution Indirect MNOs Communication services Direct Increasing overlap between communication services and social networking

15 Operator strategies to counter the OTT threat 15 Operator feature sets look increasingly weak against alternative services driven by new business models Communication services business models Player Core business Feature set Voice Messaging Video Location Social Comms business model Hardware Indirect Advertising Indirect Advertising Indirect Software licensing Moving to indirect Communication services Direct Content distribution Indirect MNOs Communication services? Operators standalone value proposition looks weak Direct

16 Operator strategies to counter the OTT threat 16 Changing business models in communication services Operator responses to the OTT threat Outlook for the MENA region

Operator strategies to counter the OTT threat 17 Operator responses Strategy Objective Examples Block OTT services Prevent OTT becoming mainstream Gain value from high-end bundles Stimulate usage

17 Operator strategies to counter the OTT threat 17 Operator responses Strategy Objective Examples Block OTT services Prevent OTT becoming mainstream Gain value from high-end bundles Stimulate usage Partner with OTT Offer RCS Offer telco OTT Defend legacy communication services Buy time Attract young smartphone users Support core data business with move to bundles Improve operator messaging Retain relevance as a communications provider Differentiate own services Retain relevance as a communications provider

18 Average France Germany Poland Spain UK USA Penetration Operator strategies to counter the OTT threat Tariff rebalancing can serve to stimulate usage of legacy services Tariff rebalancing is already underway Voice and messaging are becoming cheaper Many markets are moving towards unlimited plans Examples: SingTel migrated customers from unlimited data plans (with small voice and messaging allowances) to a tiered portfolio (with large allowances). In France: everyone has SMS unlimited for free We don t see a big strength of WhatsApp Figure: Penetration of unlimited bundles in selected countries 80% 70% 60% 50% 40% 30% 20% 10% 0% 18 Voice Messaging

Operator strategies to counter the OTT threat Globe Telecom is pursuing an aggressive partnership strategy Many operators already have productive partnerships with OTT players Facebook, for example.

19 Operator strategies to counter the OTT threat Globe Telecom is pursuing an aggressive partnership strategy Many operators already have productive partnerships with OTT players Facebook, for example. In the Philippines, Globe Telecom launched a partnership with Viber in July 2013 to prepaid customers (98% of base). GoUnli25 includes free Viber usage. Viber10 (for USD0.23) and Viber20 plans for unlimited messaging and HD voice. Extended to Facebook Messenger, KakaoTalk, Line, WeChat and WhatsApp in August (GoUnli30). Other examples include Airtel, 3 and Reliance. Promotional image for Globe s GoUnli30 service 19

Operator strategies to counter the OTT threat 20 RCS is the collective industry response RCS services have now been launched by 17 operators in 11 countries: Notably France, Germany, South Korea,

20 Operator strategies to counter the OTT threat 20 RCS is the collective industry response RCS services have now been launched by 17 operators in 11 countries: Notably France, Germany, South Korea, Spain and USA (boosted by América Móvil). Available as a downloadable app and native on 23 ranged devices. The main features are: IM and group chat (with SMS integration) file-sharing/video-streaming. Data usage is typically zero-rated on specific tariff plans. Service has yet to be marketed strongly, even in early launch markets. Rhetoric shifting towards hybrid clients, and RCS as an enabler. Screenshot of joyn

Operator strategies to counter the OTT threat 21 Telefónica is offering a telco OTT toolset to its opcos TU Go is a communications app from Telefónica Digital that: focuses on voice over Wi-Fi,

21 Operator strategies to counter the OTT threat 21 Telefónica is offering a telco OTT toolset to its opcos TU Go is a communications app from Telefónica Digital that: focuses on voice over Wi-Fi, adding network selection and virtualisation of service across devices. The first launch was with Telefónica UK (O2) in March Initially it is only available to contract customers; prepaid to follow. Usage of TU Go services is drawn down from customers bundles of minutes and messages. Screenshot of O2 UK s TU Go service

Operator strategies to counter the OTT threat Orange is integrating Libon with its product portfolio on a country-by-country basis The app allows users to

22 Operator strategies to counter the OTT threat Orange is integrating Libon with its product portfolio on a country-by-country basis The app allows users to manage their communications in a single interface, which includes: on-net calling and messaging low-cost off-net calls a single timeline and cloud storage customisable visual voic . Orange is marketing the service to customers of its Sosh sub-brand. It reports clear benefits in terms of reduced churn, improved margins and reduced usage of alternatives. Integration with RCS is planned at the client level. Orange is also white-labelling the service. Libon screenshots 22

23 Operator strategies to counter the OTT threat Remember that comms services should not be viewed in isolation; operators have indirect business models, too 23 Communication services Network connectivity Retail/distribution Weakened service portfolio Focus on monetisation of data Weakened role here, too

24 Operator strategies to counter the OTT threat Remember that comms services should not be viewed in isolation; operators have indirect business models, too 24 Communication services Network connectivity Retail/distribution Weakened service portfolio Focus on monetisation of data Weakened role here, too Improved service portfolio

25 Operator strategies to counter the OTT threat Remember that comms services should not be viewed in isolation; operators have indirect business models, too 25 Communication services Network connectivity Retail/distribution Weakened service portfolio Focus on monetisation of data Weakened role here, too Improved service portfolio Helps slow commoditisation and maintain ARPU

26 Operator strategies to counter the OTT threat Remember that comms services should not be viewed in isolation; operators have indirect business models, too 26 Communication services Network connectivity Retail/distribution Weakened service portfolio Focus on monetisation of data Weakened role here, too Improved service portfolio Helps slow commoditisation and maintain ARPU And supports initiatives here

27 Operator strategies to counter the OTT threat 27 Changing business models in communication services Operator responses to the OTT threat Outlook for the MENA region

28 Operator strategies to counter the OTT threat We forecast users/traffic/revenue (where appropriate) for operator and non-operator communication services 28 Fixed voice Mobile voice Messaging Traditional operator services Next-generation operator services CS voice CS voice SMS/MMS VoBB VoIP/VoLTE IP messaging Non-operator provided services OTT VoIP OTT VoIP OTT IP messaging

29 Users (million) Operator strategies to counter the OTT threat 29 VoIP services will continue their growth across devices By 2018, nearly 40% of MENA smartphone owners will be active (if occasional) users of mobile VoIP applications. We expect nearly 70% penetration in advanced markets such as UAE. Usage of VoIP services will spread across devices. VoIP usage is increasing on tablets. Migration from the desktop PC to the more portable laptop. Operators should consider developing services that address the trend towards multi-modal usage. Usage of OTT VoIP applications by device in MENA region, Smartphones Tablets

30 Minutes (billion) Operator strategies to counter the OTT threat Operators will remain the dominant force in mobile voice but will be significantly weakened Voice traffic originated from smartphones in MENA region, OTT IP voice Operator IP voice Circuit-switched voice A growing proportion of smartphone owners will use VoIP as their primary voice service. However, full service substitution will be very limited. By 2018, we forecast that nonoperator-provided VoIP services will generate 21% of smartphone users voice traffic. In the UAE we expect this figure to be much higher: 33% Exposure of international call volumes Higher smartphone penetration fuels network effect Availability of Wi-Fi. 30

31 Messages (trillion) Operator strategies to counter the OTT threat 31 Operators are much more vulnerable in messaging OTT messaging services will continue to grow strongly. We expect service penetration of smartphones to increase to over 60% by Full service substitution is much more viable in messaging; SMS is not a universal service and usage is strongly clustered. Partnerships look likely dominate in many markets and appetite for operators to compete head-on for the mass-market limited. Messaging volumes on smartphones in MENA region by type of service, SMS/MMS Non-operator IP Operator IP

32 USD per month Operator strategies to counter the OTT threat The revenue outlook is providing a challenge for standard investment models Investment decisions typically based on NPV/DCF assume revenue growth. The value of the communication services business is currently unknown. But some of its value is in supporting other parts of the business: Chiefly connectivity But also distribution, identity management, authentication, billing, location, etc. Some opportunities for incremental revenue but, importantly, also defence of key links in value chain. Handset ARPU in MENA region, Voice Messaging Data 32

33 Operator strategies to counter the OTT threat 33 Summary The value of communication services is increasingly indirect Dominant Internet players each have their own business model Smaller start-ups also developing new models Operators are experimenting with a range of approaches Free voice and messaging are increasingly the default Voice over Wi-Fi the clearest service enhancement Continued uncertainty about long-term role of communication services Difficulty of investment case in context of long-term revenue decline Clearer argument for supporting voice services No one size fits all solution; different solutions for different segments?

34 Operator strategies to counter the OTT threat 34 Thank you for your attention. Any questions? Stephen Sale Principal Analyst

Operator responses to the OTT voice and messaging threat

Presentation Operator responses to the OTT voice and messaging threat October 2012 Stephen Sale 2 Contents Quantifying the impact of OTT services Operator responses Issues to consider when formulating