Surreptitiously, they crept into the system, woo people onto their side and become the darling communication gateways that rubbish the traditional short message services (SMS) offered by mobile network operators. Certainly, telcos will have to find a way around the threat of OTTs else they get consumed. SAMSON AKINTARO and KAYODE ASHAOLU report.
When Innovation Becomes Threat
There is a general belief in the tech world that the more technology advances; the less of human efforts will be required in getting many things done. Already, the advancements are here with the emergence of robots that fight wars, like the US unmanned drones. Indeed, robots that do house chores are now realities in some parts of the world.
In the not–too-distant Democratic Republic of Congo, Solar-powered aluminium robots have now replaced traffic policemen on the roads of Kinshasa. The robots developed by Congolese women in technology direct traffic and are equipped with surveillance cameras in a project which authorities hope will reduce road deaths. Elsewhere, self-driving cars are being put to test as the world explores the limitless opportunities in technology.
Incidentally, the more people explore the possibilities in technology, the more they fear its negative implications, which in some cases, are as huge as the benefits. These fears are definitely not unfounded. For instance in a case where driverless cars materialises and becomes fully integrated into the society, those who hitherto require the service of personal drivers will no longer need such, thus throwing some of those in that line of profession into labour market.
But the threat facing telecommunications operators globally today as a result of innovations is more severe than the above. It is so severe that it is now threatening their existence as their revenues dwindle. The innovation threats are no other than the emergence of killer apps which include Skype, Facebook, WhatsApp Messenger, Viber, WeChat, 2go, Netflix among others, which are commonly referred to as over-the-top (OTT) services.
In a country like Nigeria for instance, the telecom revolution brought a lot of improvements to communications and boosted social life as people get more connected than before. At the early days of the revolution, many mobile subscribers would gladly make phone calls or send text message using their mobile phone as against writing and posting letters. The enthusiasm around mobile communication continued to grow and within a short period of time of entering the country, the mobile operators began to smile to the banks as revenues soar.
However, with the increasing popularity of the social media and the proliferation of OTT services, the telecom consumer behaviour has changed drastically. Today, many now prefer communicating via BBM, Facebook messenger or Whatsapp to making calls or sending text messages. Incidentally, all these OTT services ride on the telcos networks, but give them little or no returns as they would in voice calls and Short Message Services (SMS).
As a result, telecom companies, not only in Nigeria, but also across the globe, have been complaining bitterly over dwindling revenues. But the more they lament, the more the subscribers embrace the new platforms that offer them cheap means of communication at the expense of their network service providers.
To say the least, the emergence of applications such as BBM, Skype, Facebook, WhatsApp Messenger, Viber, WeChat, 2go, Netflix among others, is giving telecom operators on whose networks they ride a serious headache.Will there be any way out of the looming danger as telcos revenues continue on downward spree? Will the industry regulators rise up to this occasion? Only time, as they say, will tell.
A Warm Embrace for the Killer Apps
They may be seen as threats by telecom operators, but for the telecom consumers globally, the OTTs are the best thing to have happened in the history of the telecommunications industry. Obviously, the emergence of smartphones which come with internet capabilities and run third party applications is the impetus the OTTs need to thrive, and here is the era where over 70 per cent of mobile users prefer to go smart.
For that reason, it is not surprising that virtually every mobile user now rely on OTT services for communication. The OTTs have become so relevant that most businesses now rely on them to connect with their community of consumers; either to publicise created social media content, advertise or get direct feedback from their consumers. Hardly can one find a corporate organisation in the world today without a Twitter handle and Facebook Page, and these have come handy as communication channels to reach their various stakeholders.
From latest available statistics,YouTube now accounts for 24 per cent of global mobile traffic, Facebook Chat consumes 22 per cent of all instant message-related mobile bandwidth, WhatsApp carries 5 per cent of global messaging traffic, and Netflix boasts nearly 30 million streaming sub scribers.
In September 2013, it was revealed that 71 per cent of online adults in the world use Facebook, 17% use Instagram, 21% use Pinterest, 22% use LinkedIn, and Whatsapp attracts about 32%. Rate of use of these social networking sites are expanding—which could mean that socializing would be the only reason why a lot of people would want to use a mobile phone.
In 2014, it was also discovered that 73 per cent of U.S adults use social networking sites and over 85 per cent of Americans children within the ages of 9 and 12 use at least one social media. With climaxing level of online censorship in China, the country has over 420 million internet users, and 90 per cent of the number use indigenous social networking sites, since Facebook, Youtube and other foreign social networking sites are blocked. Out of Europe’s 900 million population, 251 million people use Facebook. 64 per cent of Facebook users in the world visit the site daily. World’s 2015 awareness level showed that Facebook is close to 100 per cent while twitter has reached 80 per cent awareness and Google Plus climbs to 70 per cent in brands popularity figure. More than 7 out of every 10 internet users in the world today are members of at least one social network; which implies that more than 1.5 billion people use social network sites. The research further shows that the world anticipates the next social application and most people want to keep their digital lives as it is with no intention to quit.
In 2014, social networking accounted for 2 out of every 5 minutes spent on the internet globally and ranking as the most engaging online activity worldwide with social networking sites now contributing 82 per cent of world’s internet population. Blogging sites such as Twitter has currently reached 1 in 10 internet users worldwide, growing 59% more than it did in 2013. China’s SinaWeibo grew by 181 per cent to rank as the tenth largest social networking site in the world. Interestingly, the adoption of social network communication is no longer exclusive to the youth population—it cuts across all age groups. Though young users, age 15-24 still represents the most highly-engaged segment of social networkers with an average of 8 hours per visitor daily, the trend is revealed to have caught acceptance among the older age segments across the globe. Infact, people of age 55 and older are representing the fastest growing age segment in global social networking usage, with the penetration of social networks in the segment increasing to nearly 10 per cent points since July 2010, to 80 per cent in 2011 and 92 per cent in 2014.
The Trend in Nigeria
In Africa, Whatsapp mobile application remains the most used social networking site with over 30 billion messages sent every day. Whatsapp became one of the social media intervention weapon used to create awareness on the Ebola virus in Sierra Leone, Liberia and Guinea, owing to the fact that the application can run on low end and Symbian mobile phones. In Nigeria, the scenario is not any different from what is obtainable in other parts of the world. People are fast adopting various social media platforms for quick and instant communication, which are considered much cheaper than communicating over the mobile network, either via voice call, which depends on the various networks call tariffs or text messaging, in which subscribers are charged N4.00 per 160 character message across all networks.
According to survey by the Pew Research Center’s Global Attitudes Project, when people use the internet in middle and low income countries, they tend to participate more in social networking than in any other internet activities. With 130million active mobile phone subscriptions, 55% of Nigeria’s population, according to African Digital Statistics in 2014 has access to internet services, while 45% of Nigerian mobile phone users use the WhatsApp application. Also last year, the number of Nigerians on Facebook was put at 11.2 million as the country leads the way in Africa in terms of Facebook users and number of internet user indexes, as well as mobile phone internet penetration.
The country’s population on the social media is predominantly youthful, representing 84 million people—population between the ages of 15 and 24 is 19%, while within 25 to 54 years contributes 31%. In 2014, 72% of all internet users in the country visited social networking sites and prefer to communicate for as long as necessary to save cost on calls and text messaging. There are also high possibilities that the number of social media subscribers may increase as more people are connected to internet facilities.
The unprecedented 41% smart phone incursion into the country’s mobile phone market and affordability of some brands of smart phones would also engender many more social media users in the country, simply because many mobile phones users consider social media sites highly flexible to use—do other things while chatting, and cheaper to communicate than making voice calls or sending text messages over the mobile network. Telecom operators in Nigeria, as it is with other operators in the world are feeling the pinch over the drop in revenue in voice calls and text messaging. Most operators have now initiated promotions and offers in which text messaging is additional benefit to subscribing to those services.
Most mobile internet subscribers who use data on their smart phones in most cases promptly renew their data subscription to avoid disconnection mainly from the social networks. Chatting and communicating across the various social networking sites alone on the social network does not consume much megabytes—the unit access to digital information. Statistics shows that there are 4 million smartphone users in Nigeria, 46% of whom uses blackberry. Ever since the BlackBerry Messenger application was patented, it has been one of the most used social applications on android phones across the Nigerian social media community. Blackberry subscription of N1,000 allows access to 400MB for a month and almost all social networking sites can also be activated. Nigerians on the social network are highly engaged in communication and are curious to use their smart phones mainly for social networking purposes, while those who own more than one mobile phone use the less sophisticated ones to make brief phone calls when necessary and text messaging when it is most necessitated.
Steep Decline in Voice Call, Text Messaging
These are definitely not the best of times for telecommunications companies all over the world as the reality of dwindling revenues stare them in the face. But while many challenges could be adduced to this, the OTT factor seems to have weighed in on the operators’ profitability more than anything else.
MTN Nigeria, for instance gave a vivid picture of the situation recently while analysing its financial performance for 2014 to the media. According to the company, its SMS revenue has declined sharply as the subscribers embrace the OTTs, this it represented with graphic illustrations showing that the new trend has led to its SMS revenue decline by 29 per cent. In the company’s words, “growths in chat applications have a cannibalising effect on voice and data revenue”.
In March, China Mobile – the world’s largest operator, announced its results for year 2014, which saw its net profit fall sharply, with higher capex for its 4G buildout biting into margins, and service revenue slipping slightly as strong gains in data revenue couldn’t offset a fall in voice/SMS. “We are facing severe challenges from intensified competition from two aspects,” stated chairman Xi Guohua. He highlighted competition from so-called OTT and Internet players, while also stressing the rivalry it faces from operators China Telecom and China Unicom.
The country’s leading mobile player posted a 10.2 per cent drop in its net profit for 2014 to CNY109 billion ($17.74 billion) and a 2.1 per cent decline in its EBITDA to CNY235.3 billion. According to the operator, voice now accounts for 53 per cent of total revenue, down from 60 per cent in 2013, while messaging (SMS/MMS) – which fell 15.8 per cent – accounts for just 6 per cent or CNY34.78 billion.
Globally, the downward trend for telcos began in 2013 when expenditure on telecommunications operator messaging services, including Short Message Service (SMS) and Multimedia Messaging Service (MMS), declined for the first time after its peak in 2012. According to Strategy Analytics, operator’s revenue from messaging services fell by almost four per cent in 2013 to just below $104 billion.
The report noted that continued intense competition for subscribers between operators combined with the fast growing popularity of over-the-top instant messaging services like WhatsApp, Line Messenger and Tencent’sWeChat will drive a 20 per cent fall in global operator messaging revenue by 2017.
Meanwhile, as far back as 2013, some analysts had also predicted that Global annual SMS revenue would dip to US$96.7 billion by 2018, with the Asia-Pacific region experiencing the highest drop. According to statistics released by Informa Telecoms & Media, annual SMS revenue would drop by US$23 billion from US$120 billion in 2013 to hit US$96.7 billion in 2018, due primarily to growing adoption of over-the-top (OTT) messaging apps in both developed and emerging markets.
The Asia-Pacific region was expected to see the sharpest dip in annual revenues over the forecast period, dropping from US$45.8 billion in 2013, to US$38 billion in 2018 due to the fact that several developers of OTT messaging apps hail from the region, including China’s Tencent which developed WeChat and South Korea’s Kakao and its Kakao Talk .
NehaDharia, analyst at Ovum in a 2014 report noted that Ovum estimated that in 2013, “the Middle East and Africa (MEA) region lost over $1 billion from SMS revenues alone due to the popularity of OTT players such as WhatsApp.” Dharia added that the MEA market is still in the early days, regarding OTTs, and Ovum expects “OTT players to significantly disrupt the market as more users adopt smartphones.
A recent TIME mobility polls shows that that many people now prefer messaging to making voice calls. The world polls further shows that the decline in talking over the phone is even truer in most workplaces, where communications between colleagues who are often not friends at all are done via text messaging.
Despite the revelation being in favour of text messaging, it revealed that the number of to-be sent text messages in 2015 will fall by more than 7 billion to 145 billion worldwide. That translates to a further decline worldwide. Majority of mobile users have now diverted attentions to communicating via instant messaging social networking sites. The beauty users found in instant message is that it can be sent cheaply through a smart phone app over the internet, rather than as a phone message via the mobile network, which can cost more. Users who are mostly youth and teenagers utilize the social networking sites to communicate with several people simultaneously and punctuate their messages with brightly coloured icons which seem very attractive to them.
Text messaging and phone calls have reached a tipping point in communication. But the usage of mobile phones to send messages is stronger than ever. This year, trillions of instant messages will be sent in place of a text message and the number of instant messages to be sent through apps will rise to 300bn in 2015.
The usage of mobile phones to send messages is stronger than ever and Deloitte 2014 telecom research also further explained that trillions of instant messages will be sent in place of a text message in 2015. Head, telecoms research at Deloitte, Paul Lee, said: “While text messaging has been growing in volume since it started, it has to come to an end of its heyday. It has reached a tipping point”.
The availability of cheap smartphone technology is tremendously contributing towards the rise of instant message with cheaper handsets, meaning more people who wouldn’t usually buy smartphones, such as the old generation are becoming regular users too. The price of the technology also means that soon, mobile phone companies will stop making traditional handsets, and people will have no choice but to convert to smartphones, which of course, give them access to all those applications.
Telcos’ Loss, OTTs’ Gain
While the telcos are complaining bitterly about what they consider as threat to their businesses, the story is definitely not the same for the OTT operators whose popularity and patronage is increasing by the day.
Expansion, consolidation, investment and re-investment, rebranding and diversifying of OTT operators are evidences of the growing global market they now control. Most of the OTT operators now manage global users account in billion and millions. Statistica’s March 2015 figures shows that Facebook became the first OTT to reach 1.4 billion global subscribers. Followed by QQ with 829 million, Whatsapp, which Facebook bought over in 2014 for $19 billion now manages 700 million accounts. Wechat, Instagram and Twitter have 468 million, 300 million and 288 million subscribers respectively.
Most of the OTT operators are now listed on their respective country’s stock exchange due to unprecedented flow of profit, especially in the United States. After Facebook’s 11 years of existence, the establishment is estimated to worth $200 billion dollars and 128 times its profit margin and trades on NASDAQ in the Unites States’ stock exchange. Twitter has been made little in America’s media spectrum by being criticized for not making enough money. The micro blogging site worths $18 billion, while Instagram, after eclipsing twitter is valued at $36 billion. LinkedIn is estimated at $7.5 billion and are all also listed on the United States’ stock exchange.
The Bright Side of OTT Challenge
Like what could be described as a silver lining behind the cloud, telcos globally are now looking at opportunities in the challenge posed by the OTTs. With the proliferation of smartphones and the growing penchant for social networking, it is obvious that subscribers will be consuming more data and that is being seen as opportunity for telcos to key into as data service providers.
It comes with a notion that the OTTs should not be viewed as enemies, as what is being lost in data and voice revenues can be regained from data. But most importantly, analysts have recommended partnerships between telcos and the OTTs to leverage on the growing trend of data consumption.
It is believed that the OTTs are increasing broadband traffic on both mobile and fixed networks, which allows operators to upgrade customers to higher value packages but this increase is also forcing the operators to upgrade their infrastructure. “The operators are missing out on value added services as they have not been able to keep up with the services and apps offered by the OTT companies,” said Paul Budde, senior analyst at research company BuddeComm.
“However, we must also note that OTT players are also bringing users on mobile broadband and creating a strong demand for mobile content, which can be beneficial for telecom operators if they are able to successfully leverage this trend,” he added.
Another analyst with Ovum, NehaDharia had noted that several operators have launched OTT subscription packs such as Etisalat in the UAE with the Social Data Pack. Operators are also working to enhance their content offerings in the region to better compete with OTT players.
According to analysts, telecom companies may cry about lost revenues, but there are plenty of opportunities for growth even in an OTT-first world. “Ecosystem tie-ups such as the one Facebook signed with Airtel in Zambia for free Internet access are an option. The advent of 4G services will bring more opportunities, especially in video streaming, live events and other aspects which require data-heavy usage. In fact, as more mobile devices replace PCs, the revenue growth potential even within cellular data is quite high, said Dharia.
According to Allen Samawi, Digital and Partnership manager at Umniah, a Jordan network operato, there are different strategies to face OTTs. “Either you do nothing, as most operators are doing in the region, or block them as happens in the United Arab Emirates or you neutralize them. Then you can emulate them or partner with them. These two last ones are the recommended options,” Samawi stated.
Emphasising the need for partnerships, Samawi noted that Umniah has been the first operator in the region to partner with Facebook, adding that the partnership that would bring benefits for both parties. “We want to give a better customer experience and Facebook is looking for expansion, that is why this partnership is good for both actors,” he said.
This was also corroborated by Yousef Abu Mutawe, CTO at Zain Jordan when he said: “Our role as operators is to partner and be able to monetize what OTTs are doing.” Mutawe reckons that OTTs are impacting on their revenues, especially on international calls and messages. “The international business will move, the volume of international calls have increased on OTT service. The market has changed and we cannot say that international calling is really a predominant part of the growth,” he added.
Also bringing out the positive side of OTT, IhabGhattas, Assistant President of Huawei Middle East, said “there is an industry-wide transformation currently taking place where a model of operators charging for access is being replaced by the offering of value-added services, either directly or indirectly. One of the channels through which we see operators keen to offer these services is through deeper cooperation with content providers and app developers. The ultimate goal is for constructing a more prosperous and sustainable ecosystem for all”. Ghattas reminded the tremendous impact that OTTs have in the revenue of the operators: “An operator typically has a core set of services and content available on their network. Clearly OTT services that pass through the network can be a challenge to these offerings, and an operator must ultimately decide for each category of offering whether to develop a competing value-added service or enter a cooperative partnership. The form of such alliances depends on what value the operator is providing to the end user. If the value is simply the access network, then it could be a form of managed wholesale. If the operator is adding further resources such as CDN or compute servers, then it is a hosted model. More intriguing, in my view, are the opportunities available to operators today to pioneer wholly new communication and entertainment services.”
In Nigeria, Airtel could be seen towing the line of leveraging on the OTTs with its recent introduction of ‘WTFB’ bundles, which gives its subscribers access to Whatsapp, Twitter, Facebook and BBM once they subscribe for the bundle. According to Airtel this data bundle was designed for customers who spend most of their time on social networks and love to stay connected with their friends and family on the go and every moment.
Generally, the stand of most analysts is that rather than see OTT only as a threat, operators need to learn from the strengths of OTT, and adapt their processes to satisfy an increasingly-demanding consumer base. This stand was corroborated by the immediate past Secretary-General of the International Telecommunications Union (ITU), HamadounToure, when he said that the approach to OTTs should not be tackling them, but working with them. During the SAMENA summit in Dubai, Toure insisted on the need to work with these content providers to grow new revenue businesses.
Waiting on Telecom Regulators
While some operators may have been working out ways of partnering with the OTTs to minimise their losses, all eyes are still on the regulators of the telecommunications industry in Africa to wade in. For one, it is believed that the fact that the OTTs are neither being regulated nor licensed in African markets where they enjoy huge patronage makes them non-accountable to any one and can do what they like.
In some countries like China and United Arab Emirates, the regulators of both countries had banned some of the OTTs, although that has not solved the problem as it affects telcos as subscribers still find a way around it. However, in Nigeria, the operators are calling for regulated OTT operations, not just for impact on their businesses but for the impact they have on the nation’s economy at large.
“These are people who have no licenses, they are not paying local taxes, they are not committed to the economy, if at all they are listed, they are listed somewhere that is not directly impacting the local economy, and they are not giving back to the community and so there’s a direct economic impact beyond the telcos,” said Olubayo Adekanmbi, the Chief Commercial Officer of MTN Nigeria. While noting that MTN, just like some other operators, had made attempt to partner with the OTTs, he said there is need for government policy to regulate their activities.
“We think that going into the future there must be a clear policy on how OTT must be managed. We do know that in many countries there is already a lot of discussion on net neutrality where it is not just about carrying contents but also knowing the kind of contents I carry so that I can charge by the type of contents. So if I know that am running some of this OTT, I can premium charge them so that at the end of the day, I’m not throwing away value because we must all commit to industry sustainability. If there is no industry tomorrow, the OTT cannot survive and everyone must recognise the roles the mobile network operators are playing in building the infrastructure that the OTT are now building on. So there must be that mutual understanding and so at the end of the day, we do kill the industry and throw value on the table whilst also ensuring that we deliver optimum value to the customers. There must be that balance,” the MTN Nigeria CMO said.
According to him, elsewhere in the world, the governments are already looking at the possibility of regulating OTTs. “Even in some countries they are banned; in countries like China, they are banned because they are not regulated they can do anything. We believe that government must look into that space where we need their local presence, we need to know the people behind it, our government must be able to regulate and then their pricing mechanism must be agreed with the mobile network operator and then there must be some mutual understanding so that both industries can thrive together without any conflicts” he said.
Regulating ‘Over-the-Top’ Services
OTT services are enabled by the de-layering of the industry. IP has separated carriage from content and allowed ‘over-the-top’ content and applications providers to deal directly with end users over networks whose owners and operators are excluded from these transactions.
The move to LTE’s all-IP architecture will create a more open environment for these OTT providers and third party services. It is not only telecommunications that is affected. Internet television over broadband fixed and mobile networks is de-stabilising existing broadcasting industries. In the following sections, we look at the policy issues raised by VoIP and other OTT services and the new concepts that apply before turning to regulatory options for managing VoIP and other OTT services.
- Policy Issues
- Key Concepts
- VoIP
- Other OTT services
Internet telephony, or “Voice over the Internet Protocol” (VoIP), is the first ‘over-the-top’ (OTT) service with major implications for the business models of both fixed and mobile network operators. More recently, text messages (SMS) have also been delivered by OTT affecting the revenues of fixed and mobile operators.
Policy Issues
Proliferation of content and applications services is to be welcomed – they add utility for users. Some new ‘over the-top’ (OTT) services did not previously exist and do not undermine the current operator business models (e.g location-based GPS mobile services). Some new OTT services may threaten the economics of investing in fast broadband networks and (eg internet television). But, change is inevitable. As network operators migrate to next generation networks, voice services will become software applications riding over the network. During this transition, policy-makers are finding different paths to balancing innovation, investment and competition.
The many policy and regulatory issues specific to VoIP are considered below.
Regulators cannot hold back the tide of changes to maintain the status quo. To a large extent, existing operators are able to change their business models to stay afloat. For example, OTT services manifest themselves on networks as traffic. If network builders and operators align revenue models more with traffic, their financial position is more secure. This would reverse current trends.
Proliferation of content and applications services is to be welcomed – they add utility for users. Some new ‘over the-top’ (OTT) services did not previously exist and do not undermine the current operator business models (e.g location-based GPS mobile services). Some new OTT services may threaten the economics of investing in fast broadband networks and (eg internet television). But, change is inevitable. As network operators migrate to next generation networks, voice services will become software applications riding over the network. During this transition, policy-makers are finding different paths to balancing innovation, investment and competition.
The many policy and regulatory issues specific to VoIP are considered below.
Regulators cannot hold back the tide of changes to maintain the status quo. To a large extent, existing operators are able to change their business models to stay afloat. For example, OTT services manifest themselves on networks as traffic. If network builders and operators align revenue models more with traffic, their financial position is more secure. This would reverse current trends.
These changes are disruptive and inconvenient for those with a stake in existing arrangements. But the benefits of change outweigh the costs. For example, VoIP leads to dramatic reductions in the cost in telecommunication and this has beneficial impacts on the development of business and economic growth. India found that VoIP opened up new employment opportunities with call centres serving overseas markets.
Regulators generally support innovation. They prevent fixed and mobile operators from blocking or degrading competing services.
Key Concepts
VoIP has been around for a number of years but there are several other ‘over-the-top’ (OTT) concepts that will become increasingly important. The concepts are all the product of the digitisation of fixed and mobile networks.
Key concepts include:
VoIP also known as voice-over-broadband (VOB) or internet telephony takes a number of different forms. Across different platforms, VoIP services can be phone-to-phone, PC-to-PC (‘on-net’), PC-to-phone (‘inbound’), phone-to-PC (‘outbound’) and phone-to-phone (‘bi-directional’ between different networks). The different forms are reflected in licensing conditions.
SMS – the short message service (texting) has been a very lucrative business for fixed and mobile operators. While network quality is a major constraint to some OTT voice applications, SMS applications are less reliant on QOS, due to them using less data and having a higher tolerance for latency.
Applications (Apps) – This term is now associated with smartphones. Early examples include Skype (first on fixed networks but now also mobiles) and there are now thousands provided by mobile operators and third parties. Their important characteristic is that they are carried over the data part of mobile service.
Cloud Services – The general idea of the ‘cloud’ is to store your media on the internet so you can access it from any device anywhere, as opposed to leaving it on a hard drive. Apple, Google, Amazon, Microsoft and Dropbox all offer cloud services.
Internet Television – With Internet (‘best-efforts’) TV (e.g. Apple TV, Google TV, Netflix) the consumer pays for the content package separately, and in addition to, the broadband access package. There is no guarantee of the quality of service. The content provider may use a VPN (Virtual Private Network) to try and secure the content from copying or may be encrypted and decrypted. But, it is delivered over the top of the Internet Service (ISP) provider’s network.
IPTV – IPTV is not ‘over-the-top’ because it is provided directly by carriers and ISPs. The consumer pays the ISP for both the content package and the broadband delivery package (e.g. ‘Triple Play’ bundles telephony, broadband and television). This allows the ISP to ‘guarantee’ some quality of service with its Content Delivery Network (CDN) to ensure that the video content is coming from the nearest possible server to the consumer’s premise and over its own network. Our focus in this module is on what these concepts mean for the regulation of competition and pricing. But we shall look also at consumer protection and other issues that arise in the context of VoIP.
VoIP
VoIP is the first of the apps enabled by IP to threaten traditional telecommunications business models because they depended on voice revenues (and mostly still do). Policy and regulatory issues and responses have evolved with the maturity of the VoIP market.
The key policy issue is how to regulate VoIP compared with the telephone services it replaces or displaces. Some countries view VoIP as a voice service while others view it as data: a ‘value-added’ or ‘information’ service.
VoIP Regulatory Issues
For example, Bolivia, Czech Republic, Egypt, Jordan and the United States view VoIP as data, while Dominica views it as voice. In the European Union, VoIP can be classified as either an Electronic Communication Service or as a Publicly Available Telephone Service.
Despite its limitations, users increasingly view VoIP as ‘functionally equivalent’ to conventional telephone service.
The quality of VoIP has improved and users can now obtain a PSTN telephone number and receive calls originated on the PSTN. Technical and consumer protection aspects are discussed in regulatory implications of VoIP.
Most countries licence different types of VoIP service. Policy makers then have to decide what aspects of conventional telephony regulation should apply to each class of VoIP service because the differences between VoIP and conventional voice service will have implications for universal service arrangements, telephone number management, public safety, and national security. For example, VoIP services are generally unable to provide access to emergency service if there is a power cut or to give reliable location information in the case of an emergency.
Recognizing the difficulties of translating existing regulatory frameworks into the IP world, the European Commission advocated a ‘light regulatory touch’ when it first examined VoIP regulation in 2004. The United States initially took a similar approach, but VoIP is becoming more regulated over time in the United States; especially in the context of security concerns (whether and how VoIP traffic can be monitored) and access to emergency call services. With a ‘light touch’, regulation is confined to specific matters such as access to telephone numbers, number portability, access to emergency services, universal service, and national security.
But it is very difficult to stop unlicensed VoIP services which can traverse the telephone network without detection. Even where regulators permit only limited or no VoIP services, incumbent operators will still face VoIP competition.
VoIP Licensing and Bangladesh
The licensing of VoIP in Bangladesh was delayed while attempts were made to establish a common platform to route all VoIP calls for national security reasons and to monitor VoIP revenues. Then when the current licenses were issued in 2009, they were set high to minimize the number of competitors. At that time, it was thought that up to 200 illegal VoIP providers were operating in Bangladesh; mainly connecting international calls from pre-paid card users, using VSAT links. The use of VSAT for voice services is not permitted. VoIP-based call termination business captured over 40 per cent of the market of incoming and outgoing international calls.
Bangladesh now requires all calls including inter-operator VoIP calls to be routed through Interconnection Exchanges or International Gateways. Intra-operator VoIP calls and other domestic data traffic must be routed through National Internet Exchanges.
The regulator, the BTRC, is still catching illegal VoIP operators. In the first eight months of 2011, the Rapid Action Battalion seized Voice over Internet Protocol (VoIP) equipment from eight unauthorised VoIP business centres — seven in the capital and one in the port city of Chittagong. And the BTRC has a running banner on its site saying: ‘Urgent Notice on Illegal VOIP: If you receive any overseas call which has a CLI display of any Bangladeshi mobile or PSTN number, please send us that number (contact details provided)’. Changing the calling number from international to local before presenting it for termination on a fixed or mobile service reduces the interconnection payable (and if it terminated as data on, say, a PC no number substitution is necessary and no fee is paid).
The ability of mobile broadband users to access Skype using iPhones led certain European operators to block Skype access over their networks to prevent loss of revenues. Regulators are now beginning to stop such practices on the basis that it is inconsistent with net neutrality.
VoIP class licences have different rights and obligations attached to each type of licence depending upon how closely the licensed service resembles PSTN voice services. Barbados has four different classes of VoIP services.
Singapore and Hong Kong VoIP Licensing
Singapore also has just two class licences. VoIP providers who want PSTN numbers (starting with ‘6’) must adhere to all PSTN rules VoIP providers can also get 8-digit numbers starting with ‘3’ where PSTN rules do not apply.
Hong Kong also adopted a two-class approach to regulating IP Telephony. Both classes of service provider must provide access to emergency services and to reserve power, but they differ in the requirements they face for number portability and numbering. Class 1 is equivalent to PSTN voice service with number portability, but Class 2 lacks numbering rights.
In the future voice telephony will migrate completely from circuit switched telephony to VoIP. Once this happens, Internet interconnection and pricing models may replace the current arrangements. Until that happens, VoIP network operators will need to interconnect with incumbent network operators’ PSTNs. VoIP providers require access to the PSTN to terminate calls to recipients who do not subscribe to the VoIP provider’s service. Interconnection typically occurs between a VoIP operator’s gateway and the PSTN operator’s point of interconnect closest to the call originator or recipient. For calls terminating on fixed networks, VoIP operators should pay PSTN operators for call switching and routing in much the same way that other carriers (such as mobile and long distance operators) do. This may be hard to enforce. Call originations from fixed networks may require a different pricing and access mechanism. For many VoIP services, the caller originates the call over a broadband access link or a wireless network. Carriers have no visibility of such VoIP calls originated on their access networks; they are just part of data traffic. However, no originating interconnection fee should arise because the customer is paying for the access link and any traffic carried over it.
Wireless networks will have a substantial impact on VoIP service development, particularly in developing countries. As wireless and VoIP traffic increase, differences in the terms and conditions under which wireline, wireless and VoIP operators interconnect networks will create opportunities for arbitrage and distort markets. Differences in call termination rates and interconnection arrangements can cause operators to adjust traffic flows to obtain the lowest possible rate, and to minimize regulatory fees.
Other ‘Over-the-Top’ Services
There are a number of other OTT services apart from VoIP that have been enabled by IP and which all have significant implications for market developments. They may pose a challenge for existing providers but do not seem to be as challenging for regulators as VoIP.
Apps that enable instant messaging and voice communication via data plans compete directly with the SMS and voice services upon which operators depend for a substantial portion of revenue. The average revenue per delivered byte is dropping, as SMS bytes, are replaced by ‘over-the-top’ bytes.
SMS and AT & T
AT&T provides a typical example of how lucrative SMS is for mobile carriers and how they may respond to the threat from OTT messaging apps.
AT&T charges 20 cents per text message if a customer does not have a messaging plan or has exceeded the allotted number of texts. From August 2011 AT&T eliminated the $10-per-month 1,000 messages option and the $5-per-month 200 messages option for individuals. New customers have the choice of either $20 per month for unlimited texting or paying $0.20 for every text and $0.30 for every multimedia message that they send or receive.
Given that an SMS message is at most 160 bytes in size, this cost scales to $1,310 per megabyte sent via text message. A one-minute phone call uses up the same amount of network capacity as 600 text messages, so that if the same cost-per-MB were applied to phone calls, mobile phone calls would cost $120 per minute.
To deal with OTT messaging apps, AT&T replaced its $30 per month unlimited data plan in June 2010 with two options. One offers up to 200MB for $15 per month (with additional use charged at $15 per 200MB). The other offers 2GB for $25 per month (with additional use charged at $10 per 1GB).
But SMS is not dead. The apps that compete with it depend upon both ends of the communication using the same app: they are closed systems. But SMS is on every phone: not just smartphones.
SMS is almost as good as email which runs on every platform and carrier throughout the world. Email is not available on every phone but in some cases it is better than SMS. For example, in Japan SMS is not cross-carrier. So a DoCoMo customer cannot text a Softbank user. But, if the phone has an e-mail client and an email address, it is the best messaging option in Japan; as long as you have a cheap data plan. And, it is more easy for manufacturers to build email clients into phones than anything else, because email has standard protocols behind it.
Cloud Services
Traditionally, users had to physically connect devices to move, say, a photo from a smartphone to a home computer. With cloud services, as soon as a photo is taken it can be uploaded immediately to the cloud to be viewed anywhere, on any device. Google, Microsoft, Apple, and Amazon have all made significant investments in their operating systems and cloud services so that computers and mobile devices will seamlessly and silently upload files to one master location.
Cloud services put more pressure on network capacity. Traditional (physical) syncing placed no demands on the network but the cloud changes things. Now, instead of consuming no bandwidth when syncing 100 MB of photos back to a computer, cloud syncing uses 100 MB of data when uploading data and then an additional 100 MB downloading to each device connected to the cloud. While most services offer the option to sync only when on
WiFi networks (e.g. coffee shops, living rooms), these cloud services could still result in significant additional bandwidth costs and potential bill shock for consumers. For subscribers who perform complete system back-up, the shock could be even greater.
There are no clear issues yet for competition and pricing and any that emerge are likely to be addressed first in developed markets.
Internet Television
Digitisation of broadband networks (both fixed and mobile) is causing tectonic shifts in business models. Traditionally, carriage and content went together: not any more. Video was the ‘killer app’ that prompted the building of cable and broadband networks. The network builders assumed they would be the providers of the content. But the impetus for delivering content over broadband is now coming from non-traditional sources that do not build the networks they rely on.
Netfix
In 2007, Netflix started streaming back-list movies to subscribers in the USA and now has over 20m customers globally. It began offering unlimited movie downloads in Canada for $7.99 a month in 2010 and by August 2011 it had signed up 10 per cent of Canadian broadband households; a feat that took six years in the United States.
Sandvine reports that Netflix accounted for 32.7 per cent of all North American peak fixed access downstream content in the Fall of 2011. That put Netflix ahead of the other three top Internet protocols or services by daily volume—approaching double HTTP (17.48 per cent), almost three times YouTube (11.32), and nearly four times BitTorrent.
Content producers, equipment vendors and communications service providers have a ‘three screen’ strategy to deliver content to TVs, computers and mobile devices. More than half the peak-period traffic over fixed access networks is real-time entertainment with more than half going to game consoles, smart TVs, handhelds and mobile devices rather than to desktop and laptop computers.
Peak Period Traffic Composition, North America
Note: Not only have the builders of networks been deprived of the revenues that they expected out of video but also they have to augment their networks to keep-up with the growth in video traffic; on which they earn very little. Most video traffic adapts to network congestion by shifting to lower bitrates and quality, which impacts the subscriber experience on broadband. When capacity is increased, adaptive video simply upshifts to a higher fidelity and fills the new capacity.
Regulators do not want to stifle innovation across content and devices. Carriers will have to adapt their business and pricing models.