Generating more revenue from VAS: OTT communication and media strategies European Summit 2013: Enabling innovation, driving profitability Generating more revenue from VAS: OTT communication and media strategies 10 October 2013 Stephen Sale and Cesar Bachelet EVENT PARTNER:
Generating more revenue from VAS: OTT communication and media strategies Digital data and ubiquitous high-speed connectivity have enabled the emergence of OTT services OTT and the possible disintermediation of operators 2 Infrastructure Services Devices Operators Operators Providers of OTT services Device manufacturers
Generating more revenue from VAS: OTT communication and media strategies 3 Communication services Media services
Retail/distribution Generating more revenue from VAS: OTT communication and media strategies Players from across the mobile value chain are moving into communication services 4 Hardware OS Content and applications Network connectivity Operator services as defaults in the native dialler
Retail/distribution Generating more revenue from VAS: OTT communication and media strategies Players from across the mobile value chain are moving into communication services 5 Hardware OS Content and applications Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler
Retail/distribution Generating more revenue from VAS: OTT communication and media strategies Players from across the mobile value chain are moving into communication services Handsets offer alternative native features 6 Hardware OS Content and applications Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler
Retail/distribution Generating more revenue from VAS: OTT communication and media strategies 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 Network connectivity A wide range of downloadable alternatives Operator services as defaults in the native dialler
Retail/distribution Generating more revenue from VAS: OTT communication and media strategies Players from across the mobile value chain are moving into communication services Handsets offer alternative native features increasingly presented as default 8 Hardware OS Content and applications Tighter integration forthcoming? A wide range of downloadable alternatives Network connectivity Operator services as defaults in the native dialler
Generating more revenue from VAS: OTT communication and media strategies 9 Operator feature sets look increasingly weak against alternative services driven by new business models Figure: Communication services business models [Source: Analysys Mason, 2013] 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
Generating more revenue from VAS: OTT communication and media strategies 10 Operator feature sets look increasingly weak against alternative services driven by new business models Figure: Communication services business models [Source: Analysys Mason, 2013] 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 Value of communication services increasingly co-opted
Generating more revenue from VAS: OTT communication and media strategies 11 Operator feature sets look increasingly weak against alternative services driven by new business models Figure: Communication services business models [Source: Analysys Mason, 2013] 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 comms services and social networking
Generating more revenue from VAS: OTT communication and media strategies 12 Operator feature sets look increasingly weak against alternative services driven by new business models Figure: Communication services business models [Source: Analysys Mason, 2013] 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
Total France Germany Poland Spain Total France Germany Poland Spain Percentage of respondents UK USA Percentage of respondents UK USA Generating more revenue from VAS: OTT communication and media strategies Alternative messaging services have gone mass-market in some countries, while VoIP penetration remains low Figure: VoIP penetration of smartphones Figure: IP messaging penetration of smartphones 13 70% 60% 50% 40% 30% 20% 10% 70% 60% 50% 40% 30% 20% 10% 0% 0%
Generating more revenue from VAS: OTT communication and media strategies IP messaging volumes are reaching parity with SMS on smartphones Figure: Share of smartphone minutes in Western Europe, 2012 Figure: Share of smartphone messaging in Western Europe, 2012 14 15 billion VoIP minutes (5%) 290 billion minutes (95%) 225 billion IP messages (46%) 265 billion messages (54%) Operator Non-operator Operator Non-operator
Generating more revenue from VAS: OTT communication and media strategies New services aim to enhance the user experience for operators installed base 15 Service Features Voice/SMS over Wi-Fi Multi-device access Visual voicemail Cloud storage of timeline Multi-device access for voice and messaging On-net video chat Cloud storage of contacts Free on-net VoIP and messaging Off-net calling Smart chat Customisable visual voicemail Cloud timeline Chat/group chat File sharing, including live video Pricing Calls/texts drawn from bundle No subscription charge Calls/texts drawn from bundle Int l call packages Phone add-on Freemium (OTT) Subs packages via Orange operating co s Typically linked to data plans Some operators zero-rate traffic Commercial objective Extend presence across devices Limit substitution Extend presence across devices Limit substitution Limit substitution Product differentiation Limit substitution
Generating more revenue from VAS: OTT communication and media strategies Communication services should not be viewed in isolation; operators have indirect business models, too 16 Communication services Weakened service portfolio Network connectivity Focus on monetisation of data Retail/distribution Weakened role here, too
Generating more revenue from VAS: OTT communication and media strategies Communication services should not be viewed in isolation; operators have indirect business models, too 17 Communication services Weakened service portfolio Network connectivity Focus on monetisation of data Retail/distribution Weakened role here, too Improved service portfolio
Generating more revenue from VAS: OTT communication and media strategies Communication services should not be viewed in isolation; operators have indirect business models, too 18 Communication services Weakened service portfolio Network connectivity Focus on monetisation of data Retail/distribution Weakened role here, too Improved service portfolio Helps slow commoditisation and maintain ARPU
Generating more revenue from VAS: OTT communication and media strategies Communication services should not be viewed in isolation; operators have indirect business models, too 19 Communication services Weakened service portfolio Network connectivity Focus on monetisation of data Retail/distribution Weakened role here, too Improved service portfolio Helps slow commoditisation and maintain ARPU And supports initiatives here
2012 2013 2014 2015 2016 2017 EUR per month Generating more revenue from VAS: OTT communication and media strategies Investment models need to adapt to a changing market environment 20 Investment decisions typically based on NPV/DCF assume revenue growth Figure: Handset ARPU in Western Europe 25 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. 20 15 10 5 Data Messaging Voice Some opportunities for incremental revenue but, importantly, also defence of key links in value chain 0
Generating more revenue from VAS: OTT communication and media strategies 21 Key takeaways Communications capabilities increasingly co-opted into indirect business models Operator comms feature sets look increasingly weak, though many are now offering apps to support their basic propositions Industry uncertainty about platform business models and the long-term future of communication services Challenge to build new investment cases on the basis of a broader understanding of the role of communication services
Generating more revenue from VAS: OTT communication and media strategies 22 Communication services Media services
Generating more revenue from VAS: OTT communication and media strategies OTT video services are redefining the value chain for paid-for video services to the TV 23 Value chains for traditional pay TV and OTT video services Content creation Content aggregation & packaging Content distribution Devices Broadcasters Movie studios Pay TV operators Traditional closed pay TV model Broadcasters Pure-play OTT video provider Retailer CE device manufacturers / vendors Movie studios Open OTT video model
Generating more revenue from VAS: OTT communication and media strategies Before we go any further our definition of OTT video services to the TV Definition of OTT video services to the TV 24 X Any broadband connection X
Generating more revenue from VAS: OTT communication and media strategies Multiple business models are emerging for paid-for OTT video services Business models for paid-for OTT video services 25 SVoD Web TV TVoD Freemium
Generating more revenue from VAS: OTT communication and media strategies OTT video services will account for just 5% of primary pay TV services, but over 50% of secondary services Pay-TV households by platform, Western Europe, 2013 2018 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of pay TV households100% Analogue cable IPTV Satellite Digital cable Pay-DTT OTT video Secondary pay TV services by platform, Western Europe, 2013 2018 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Analogue cable % of secondary pay TV services100% IPTV Satellite Digital cable Pay-DTT OTT video 26
EUR, million Generating more revenue from VAS: OTT communication and media strategies Although spend on OTT video services will grow rapidly, it will only account for 6% of pay TV spend in 2018 Spend on OTT video services by type of content, Western Europe, 2013 2018 2,500 2,000 1,500 1,000 500 Pay TV spend by platform, Western Europe, 2013 2018 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Share of pay TV spend100% 27 0 Web TV TVoD SVoD Analogue cable IPTV Satellite Digital cable Pay-DTT OTT video
% of respondents who are pay TV subscribers Generating more revenue from VAS: OTT communication and media strategies Only 1% of pay TV subscribers cite online video as a reason for cutting the cord Planned changes to pay TV service Reasons for giving up pay TV service 28 8% 7% 6% 5% 4% 3% 2% 1% 0% 28% 13% 12% Satisfied with free TV 33% 13% Satisfied with free TV and free online video Satisfied with free TV and paid-for online video Cannot afford any longer
Percentage of respondents who don't subscribe to pay TV Generating more revenue from VAS: OTT communication and media strategies Although more than 40% of non-subscribers watch OTT video, only 3% cite it as a reason not to take up pay TV Usage of online video services among non-pay TV subscribers 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Free online video Paid-for online video Reasons for not taking up pay TV services 15% 17% 18% 3% 28% 19% Free TV sufficient Low TV consumption Online video sufficient Not value for money Not affordable 29
Generating more revenue from VAS: OTT communication and media strategies Pay TV subscribers are far more likely to own streaming devices and pay for OTT video than non-subscribers Ownership of devices Usage of popular OTT video services 30 Connected DVD / Blu-ray Netflix Internet STB itunes Store Smart TV Games console LOVEFiLM 0% 50% 100% 150% Percentage difference (Pay TV subscribers vs. non-subscribers) 0% 20% 40% 60% Percentage difference (Pay TV subscribers vs. non-subscribers)
Generating more revenue from VAS: OTT communication and media strategies 31 Operators can capitalise on OTT video in various ways Operator strategies in relation to OTT video services Revenue generation Launching OTT video services to extend reach Offering solutions to providers of OTT video services Cost control Delivering own content to other unmanaged devices Delivering own content to TV via unmanaged devices Tiered broadband tariffs Incorporating OTT video content on pay- TV platform Competition Cooperation
Generating more revenue from VAS: OTT communication and media strategies 32 Key takeaways We do not expect a significant number of consumers to take OTT video services as a primary pay TV service only 3% of Western European households (amounting to 7.5% of FTA TV households) will do so in 2018 However, we anticipate that OTT video services will account for 51% of secondary pay TV services in 2018, amounting to 11% of Western European households Only 1% of pay TV subscribers we surveyed planned on cutting the cord due to OTT video services, while 3% of the non-subscribers cited OTT video services as a reason for not taking up pay TV services According to our Connected Consumer survey, pay TV subscribers were 41% more likely to use Netflix than non-subscribers, more than twice as likely to own a connected Blu-ray / DVD player and 35% more likely to own a smart TV Most traditional pay TV operators can capitalise on this by delivering video services to unmanaged devices to reduce capex, while incorporating OTT video services within their offer to maintain their central role Traditional pay TV operators with suitable content can launch OTT video services to extend their reach, and thus spread the cost of content over a wider base.
Generating more revenue from VAS: OTT communication and media strategies 33 Comparing the impact of OTT services on operators Comparison of OTT communications and video markets Barriers to entry Substitution of traditional services Addressable market Impact on operators Ability of operators to successfully respond OTT comms Low for messaging, falling for voice and videocomms High for messaging, lower for voice; little established position in video Currently early adopters but driven by increasing device penetration Varies; potentially high Variable OTT video Medium (high for content, low for infrastructure) Partial, usage mostly complementary, rather than substitutive All consumers, but more attractive to pay TV subscribers Limited revenue impact but potential cost implications High
Generating more revenue from VAS: OTT communication and media strategies 34 Any questions?
Generating more revenue from VAS: OTT communication and media strategies 35 Contact details Stephen Sale Principal Analyst stephen.sale@analysysmason.com Cesar Bachelet Senior Analyst cesar.bachelet@analysysmason.com Boston Tel: +1 202 331 3080 Fax: +1 202 331 3083 boston@analysysmason.com Cambridge Tel: +44 (0)1223 460600 Fax: +44 (0)1223 460866 cambridge@analysysmason.com Dubai Tel: +971 (0)4 446 7473 Fax: +971 (0)4 446 9827 dubai@analysysmason.com Dublin Tel: +353 (0)1 602 4755 Fax: +353 (0)1 602 4777 dublin@analysysmason.com Edinburgh Tel: +44 (0)131 443 9933 Fax: +44 (0)131 443 9944 edinburgh@analysysmason.com London Tel: +44 (0)20 7395 9000 Fax: +44 (0)20 7395 9001 london@analysysmason.com Madrid Tel: +34 91 399 5016 Fax: +34 91 451 8071 madrid@analysysmason.com Manchester Tel: +44 (0)161 877 7808 Fax: +44 (0)161 877 7810 manchester@analysysmason.com Milan Tel: +39 02 76 31 88 34 Fax: +39 02 36 50 45 50 milan@analysysmason.com New Delhi Tel: +91 124 4501860 newdelhi@analysysmason.com Paris Tel: +33 (0)1 72 71 96 96 Fax: +33 (0)1 72 71 96 97 paris@analysysmason.com Johannesburg Tel: +27 11 666 4786 Fax: +27 11 666 4788 johannesburg@analysysmason.com Singapore Tel: +65 6493 6038 Fax: +65 6720 6038 singapore@analysysmason.com
Generating more revenue from VAS: OTT communication and media strategies 36 First Breakout Stream 12:30-1:15 Breakout Streams: Choose one to attend Broadband traffic growth and the LTE/fixed access tipping point : Chris Nicoll and Rupert Wood York Suite Apple/Google/Facebook: mobile and OTT strategies and impact: Ronan de Renesse and Stephen Sale Crystal Ballroom (this main room) The end of M2M and the birth of IoT: Steve Hilton, Principal Analyst, Enterprise Windsor Suite