1. 30 October 2016
Communications disruption has benefits,
but at what cost?
The competition brought by OTT market players has
resulted from disruptive technology.The mobile telecom
market has had to adapt and adjust to a new playing field,
which some believe is not level, while others consider the
result to be a greater good for consumers.There arises a
huge challenge for regulators: Should OTT applications
be characterized as telecom services (voice or data) or
telecom infrastructure? And ought they be subject to further
regulation and taxation?
Moreover, market liberalization has not only resulted from
the issuance of additional MNO licenses by governments
in world markets, for de facto market liberalization has
occurred from the actions of OTT players and states’
benevolent attitudes toward them, with regard to regulatory
classification and taxation. Regulators are caught in the
crosshairs as they try to maintain competitive balance and
total access to information, while also trying to preserve
investor value, private and government revenue generation,
and adherence to general law.
The added competition from OTT application providers,
Bypass Fraud and OTT impact
on ICT investments
Thomas W. Wilson III
(Part 1 of a 3 part series)
Introduction
The future is now with regard to how mobile telecom operators (MNO)
react to the onslaught of freemium services which shift revenues from
the operators to the so called OTT (over the top) service providers. It
is difficult to over-state the dramatic impact the OTT service have on
MNO revenues. Why? Simply stated, MNO investment costs, required
to meet increased broadband demand, are increasing at the same time
that margins on MNO voice and SMS revenues are declining as users
shift to OTT services. Additional revenue from mobile data plans are
insufficient to fuel the necessary future infrastructure investments.
Stated another way, the OTTs use MNO facilities without paying a fair
share of infrastructure costs or other industry taxes and fees.
Market research company Ovum estimated that the telecom operators
will suffer losses of around 386 Billion USD from 2012 to 2018.This
trend is only going to grow with the continued growth of application-
based voice and messaging platforms. Popular applications, and
especially the most famous social media applications are proliferating
greatly as the Internet expands its reach globally.This exposes the
MNOs’ networks to greater loads while revenues continue to be
siphoned elsewhere, primarily to the OTT’s.The increased pressure on
the networks comes not just fromYouTube and Facebook — there is
an explosion of applications such as BBM, Chat On, KakaoTalk, What’s
App,Vibro,Tango, Instagram,Vine, We Chat, Snapchat,Yahoo, Google
+, Pinterest, Skype (direct peer to peer, application which works
differently than most of the others), Num Buzz, Line,Vine, Linked In,
Fring, Netflix, Hulu, Amazon, Google Hangouts,Viber andTwitter.That
list continues to grow.
There is another, very significant threat from the OTT sector, known
as OTT bypass fraud, which is transcendental in scale and if not abated
in some measure, could be cataclysmic to the business model of
MNOs. Prior to OTT Bypass, the OTT’s disrupted the access side of the
network; however now the terminating side of the network is under
peril. Many applications are tying subscribers to their GSM mobile
numbers, which is a simple and convenient way to build databases
that can be sold to wholesale networks, to terminate calls to their apps
on their user smart phones.This is the main difference betweenVoice
apps that use phone numbers (such as WhatsApp) and OTT-to-OTT
voice services, such as Skype.The OTT bypass redirects calls made to a
mobile number on an operator network onto data networks where the
calls terminate (if the app is open on the called party’s smart phone) on
the freemium application of the smart phone.This process circumvents
the usual termination of calls on the MNO’s network and deprives the
MNO’s of their usual termination revenue.Yet the operators continue
to bear the cost of the network investment, together with spectrum,
licenses, excise taxes and other fees and taxes.This situation is clearly
unsustainable.
Market research company Ovum
estimated that the telecom
operators will suffer losses of
around 386 Billion USD from
2012 to 2018.This trend is only
going to grow with the continued
growth of application-based voice
and messaging platforms”

2. INTERNATIONAL
teletimes
31October 2016
Shift in Revenues to the OTT’s while Costs stay with the Operators
Parameters Telcos OTT Players
License Costs Yes – < Many Millions No - $0
Spectrum Costs Yes – < Billions USD No - $0
Rev Share 8% AGR N/A - $0
Universal Service Fund 5% AGR No - $0
CorporateTaxes 34% LocalTax Structure but rare
Customer Care Required Not Required
QoS Requirements Tightly Managed Best Effort Only
Security Mandatory Not Mandatory/elective
Cross Platforms - Joyn Can be Done Not Possible
(current apps like Skype,Viber, WhatsApp,
and a cast of hundreds, as well as industry-
wide efforts such as WebRTC, RCS and
others) allows users to communicate more
efficiently and more cost effectively.This
OTT activity created initial benefits for
MNOs by driving increased data usage,
which, if effectively priced, improved
revenues although with certain inherent
risk. Some users received flat-rate
unlimited data packages.
The standard 80 – 20 rule tended to apply,
where 20% of users created 80% of data
traffic, and this was usually over unlimited
data plans. Larger revenues and market
share potentially mitigated financial risk,
at least when these pricing plans were
launched.
“Operators will remain the dominant
force in mobile voice but will be
significantly weakened as OTTVoIP services
continue to grow.” – OTT communication
services worldwide: forecasts 2013– 2018
Operators in many countries have
struggled, while data traffic spiked
enormously from mounting messaging,
gaming, video, and voice traffic over the
same data networks, and, principally, OTT
providers were not assisting with regard
to investment in infrastructure, which is so
critical towards successful deployment of
broadband programs.
Many operators that were slower to adapt
suffered. Regulation in some markets
demanded operators to stay with pricing
that did not properly monetize data
usage, and a resultant decrease in revenue
efficiencies occurred.
Impact of Smartphone and OTT
Services
The use of ubiquitous technologies greatly
altered the basic means of either sending
a message or making a voice call.The
free costs, the convenience of access, as
well as the unique novelty of application
converted many users from traditional
SMS.The prime catalyst has been and is
the smartphone: eMarketer estimated the
number of smartphones as of end 2015 at
1.5 billion. Seventy per cent (70%) of the
world’s population will own smartphones
by 2020 (Ericsson 2014).
Costs for entry-level smartphones continue
to decline, and global vendors are focusing
on developing markets with burgeoning
populations yearning for mobile services.
Lower-cost smartphones sold in developing
countries can greatly alter market forces
in the industry.The second catalyst for
change was the ability for users to send
free over data networks rather than paying
operators per SMS.Voice usage follows
similarly, although slightly less radically.
“More than half of smartphone owners
worldwide are already active users of OTT
messaging apps.” – Future Comms and
Media, 2014
The impact of OTT’s with regard to normal
peer to peer or OTT bypass against the
operators is very large. In an attempt for
an apples to apples comparison, below are
listed some of the costs and revenues that
are shifted from one sector to another:
The advent of the smartphone has
essentially created an entire cottage
industry with regard to how people speak
to and message each other as well as
message each other.This new ecosystem
is highly dependent upon the Internet,
bandwidth requirements, and operating
systems for smartphones, such as Google’s
Android, Apple’s iOS, and Microsoft’s
Windows platform.
The second part in this series will be
published in the next month and will discuss
the technical side of By-pass fraud in more
detail, and address alternative approaches
and potential results/outputs by addressing
the issue.
Operators in many countries have struggled, while
data traffic spiked enormously from mounting
messaging, gaming, video, and voice traffic over the
same data networks, and, principally, OTT providers
were not assisting with regard to investment in
infrastructure, which is so critical towards successful
deployment of broadband programs”