Telco revenue is going OTT, but not in a good way

Telco revenue is going OTT, but not in a good way

OTT is fast becoming a massive threat to telcos’ revenue management, the effect of which is clearly evidenced by double digit revenue loss for operators in 2014.

What is the OTT threat?

Over-the-top (OTT) applications – apps and services that offer a service over the Internet, bypassing traditional distribution – have struggled to monetise their services, particularly services offering free over-the-internet phone calls.  The majority of these services have got by with modest ad-based revenue, but with competition building to offer the most reliable and quality service available, some companies have recognised the opportunity to route plain ordinary telephone calls to handsets with their apps.  By routing plain telephone calls to an OTT service provider’s app, the provider is in a sense hijacking termination revenues ordinarily received by the traditional network operator.

How does OTT bypass work?

OTT apps have been proactively touting their capability to terminate calls to second and third tier telcos.  Their newly recruited carrier sales teams offer to terminate normal telephone to telephone calls by connecting them through their apps.  The caller calls someone’s mobile number, the recipient of the call ends up receiving the call within an OTT app, and the app gets to keep the termination charge for connecting the call.

From a user perspective, the call was legitimately placed to a mobile – not via the OTT service – and therefore the caller has the right to expect the call to be connected to the other person’s phone, not an app.  With call quality, voicemail capabilities and caller ID all possibly affected, the impact can be significant.  Furthermore, there is a crucial data issue if the call is re-directed from traditional routes to an IP route:  if the caller is abroad, the data used to receive the call can add up to a large roaming bill.

Is any of this legitimate?

OTT to OTT calls are legitimate competition and most carriers will have to live with the consumer choosing to call relatives and friends using an over-the-top app.  Like any competition, carriers will have to increase their focus on delivering a superior service, or move into the OTT space themselves.  What is less certain is whether hijacking a call from normal telephony, removing the choice from the consumer for gain, and terminating the call without a licence is a legitimate activity for an OTT messaging app.

Some may argue that all competition is fair competition but there does seem to be something unsavoury about an app that could not exist without a reliable network infrastructure (to which it does not contribute financially) generating revenues that would otherwise go to the creator and maintainer of that network.

What this means for operators

Some operators are seeing their revenues from call termination drop by 50% due to OTT activity.  This is counterproductive, as the operators are responsible for creating and maintaining a decent network for the OTT players to use.  Part of that “deal” with regulators and Governments around the world is that they receive revenue from termination charges in exchange for maintaining the networks and keeping costs low for business and customers to thrive.  With restrictions on termination charge rates and more and more data being used, networks are beginning to buckle under the pressure.

If telcos continue to lose revenue to OTT companies that use their networks but do not contribute to the cost, it is a grim future for all.  Rarely does anything come for free, but the severe reduction in termination charges and revenue for telcos can only mean one thing for the industry as a whole: less revenues to support and maintain increasingly critical networks.