VoLTE: Voice beyond the phone call?

Introduction

Telephony is still necessary in the 4G era

Some people in the telecom industry believe that “voice is dead” – or, at least, that traditional phone calls are dying off. Famously, many younger mobile users eschew standalone realtime communications, instead preferring messaging loaded with images and emoji, via apps such as Facebook Messenger and WeChat, or those embedded e.g. in online gaming applications. At the other end of the spectrum, various forms of video-based communications are important, such as SnapChat’s disappearing video stories, as well as other services such as Skype and FaceTime.

Even for basic calling-type access, WhatsApp and Viber have grown huge, while assorted enterprise UC/UCaaS services such as Skype for Business and RingCentral are often “owning” the business customer base. Other instances of voice (and messaging and video) are appearing as secondary features “inside” other applications – games, social networks, enterprise collaboration, mobile apps and more – often enabled by the WebRTC standard and assorted platforms-as-a-service.

Smartphones and the advent of 4G have accelerated all these trends – although 3G networks have seen them as well, especially for messaging in developing markets. Yet despite the broad uptake of Internet-based messaging and voice/video applications, it is still important for mobile operators to provide “boring old phone calls” for mobile handset subscribers, not least in order to enable “ubiquitous connection” to friends, family and businesses – plus also emergency calls. Plenty of businesses still rely on the phone – and normal phone numbers as identifiers – from banks to doctors’ practices. Many of the VoIP services can “fall back” to normal telephony, or dial out (or in) from the traditional telco network. Many license terms mandate provision of voice capability.

This is true for both fixed and mobile users – and despite the threat of reaching “peak telephony”, there is a long and mostly-stable tail of calling that won’t be displaced for years, if ever.

Figure 1: Various markets are beyond “peak telephony” despite lower call costs

Source: Disruptive Analysis, National Regulators

In other words, even if usage and revenues are falling, telcos – and especially mobile operators – need to keep Alexander Graham Bell’s 140-year legacy alive. If the network transitions to 4G and all-IP, then the telephony service needs to do so as well – ideally with feature-parity and conformance to all the legacy laws and regulation.

(As a quick aside, it is worth noting that telephony is only one sort of “voice communication”, although people often use the terms synonymously. Other voice use-cases vary from conferencing, push-to-talk, audio captioning for the blind, voice-assistants like Siri and Alexa, karaoke, secure encrypted calls and even medical-diagnostics apps that monitor breathing noise. We discuss the relevance of non-telephony voice services for telcos later in this report).

4G phone calls: what are the options?

  • CSFB (Circuit-Switched Fallback): The connection temporarily drops from 4G, down to 3G or 2G. This enables a traditional non-IP (CS – circuit-switched) call to be made or received on a 4G phone. This is the way most LTE subscribers access telephony today.
  • VoLTE: This is a “pure” 4G phone call, made using the phone’s in-built dialler, the cellular IP connection and tightly-managed connectivity with prioritisation of voice packets, to ensure good QoS. It hooks into the telco’s IMS core network, from where it can either be directly connected to the other party (end-to-end over IP), go via a transit provider or exchange, or else it can interwork with the historic circuit-based phone network.
  • App-based calling: This involves making a VoIP call over the normal, best-efforts, data connection. The function could be provided by a telco itself (eg Reliance Jio’s 4GVoice app), an enterprise UC provider, or an Internet application like Skype or Viber. Increasingly, these applications are also integrated into phones “native dialler” interface and can share call-logs and other functions. [Note – STL’s Future of The Network research stream does not use the pejorative, obsolete and inaccurate term “OTT”.]

None of these three options is perfect.

Content:

  • Executive Summary
  • Introduction
  • Telephony is still necessary in the 4G era
  • 4G phone calls: what are the options?
  • The history of VoLTE
  • The Good, the Bad & the Ugly
  • The motivations for VoLTE deployment
  • The problems for VoLTE deployment?
  • Industry politics
  • Market Status & Forecasts
  • Business & Strategic Implications
  • Is VoLTE really just “ToLTE”?
  • Link to NFV & Cloud
  • GSMA Universal Profile: Heaven or Hell for Telcos?
  • Do telcos have a role in video communications?
  • Intersection with enterprise voice
  • Conclusions
  • Recommendations

Figures:

  • Figure 1: Various markets are beyond “peak telephony” despite lower call costs
  • Figure 2: VoLTE, mobile VoIP & LTE timeline
  • Figure 3: VoLTE coverage is often deployed progressively
  • Figure 4: LTE subscribers, by voice technology, 2009-2021

B2B growth: How can telcos win in ICT?

Introduction

The telecom industry’s growth profile over the last few years is a sobering sight. As we have shown in our recent report Which operator growth strategies will remain viable in 2017 and beyond?, yearly revenue growth rates have been clearly slowing down globally since 2009 (see Figure 1). In three major regions (North America, Europe, Middle East) compound annual growth rates have even been behind GDP growth.

 

Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)

Source: Company accounts; STL Partners analysis

To break out of this decline telcos are constantly searching for new sources of revenue, for example, by expanding into adjacent, digital service areas which are largely placed within mass consumer markets (e.g. content, advertising, commerce).

However, in our ongoing conversations with telecoms operators, we increasingly come across the notion that a large part of future growth potential might actually lie in B2B (business-to-business) markets and that this customer segment will have an increasing impact of overall revenue growth.

This report investigates the rationale behind this thinking in detail and tries to answer the following key questions:

  1. What is the current state of telco’s B2B business?
  2. Where are the telco growth opportunities in the wider enterprise ICT arena?
  3. What makes an enterprise ICT growth strategy difficult for telcos to execute?
  4. What are the pillars of a successful strategy for future B2B growth?

 

  • Executive Summary
  • Introduction
  • Telcos may have different B2B strategies, but suffer similar problems
  • Finding growth opportunities within the wider enterprise ICT arena could help
  • Three complications for revenue growth in enterprise ICT
  • Complication 1: Despite their potential, telcos struggle to marshal their capabilities effectively
  • Complication 2: Telcos are not alone in targeting enterprise ICT for growth
  • Complication 3: Telcos’ core services are being disrupted by OTT players – this time in B2B
  • STL Partners’ recommendations: strategic pillars for future B2B growth
  • Conclusion

 

  • Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)
  • Figure 2: Telcos’ B2B businesses vary significantly by scale and performance (selected operators)
  • Figure 3: High-level structure of the telecom industry’s revenue pool (2015) – the consumer segment dominates
  • Figure 4: Orange aims to expand the share of “IT & integration services” in OBS’s revenue mix
  • Figure 5: Global enterprise ICT expenditures are projected to growth 7% p.a.
  • Figure 6: Telcos and Microsoft are moving in opposite directions
  • Figure 7: SD-WAN value chain
  • Figure 8: Within AT&T Business Solutions’ revenue mix, growth in fixed strategic services cannot yet offset the decline in legacy services

Google/Telcos’ RCS: Dark Horse or Dead Horse?

Introduction

The strategic importance of digital communications services is rising fast, as these services now look set to become a major conduit for digital commerce. Messaging services are increasingly enabling interactions and transactions between consumers and businesses. Largely pioneered by WeChat in China, the growing integration of digital communications and commerce services looks like a multi-billion dollar boon for Facebook and a major headache for Amazon, eBay and Google, as outlined in the recent STL Partners report: WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce.

This report analyses Google’s and telcos’ strategic position in the digital communications market, before exploring the recent agreement between leading telcos, the GSMA and Google to use the Android operating system to distribute RCS (Rich Communications Service), which is designed to be a successor to SMS and MMS. Like SMS, RCS is intended to work across networks, be network-based and be the default mobile messaging service, but it also goes far beyond SMS, by supporting rich features, such as video calling, location sharing, group chat and file sharing.

The report then undertakes a SWOT (strengths, weaknesses, opportunities and threats) analysis on the new Google supported RCS proposition, before considering what telcos need to do next to give the service any chance of seeing widespread adoption.

Google’s strategic headache

To Google’s alarm, mobile messaging looks set to become the next major digital commerce platform. In some ways, this is a logical progression of what has come before. Although neither Google nor Amazon, two of the leading digital commerce incumbents, seem well prepared for the rise of “conversational commerce”, communications and commerce have always been interwoven – physical marketplaces, for example, serve both functions. In the digital era, new communications services, such as SMS, email and mobile calls, were quickly adopted by companies looking to contact consumers. Even now, businesses continue to rely very heavily on email to communicate with consumers, and with each other, and through Gmail, Google has a strong position in this segment.

But many consumers, particularly younger people, now prefer to use mobile messaging and social networking services to communicate with friends and family and are using email, which was developed in the PC era, less and less. People are spending more and more time on messaging apps – some industry executives estimate that consumers spend 40% of their time on a mobile phone purely in a messaging app. Understandably, businesses are looking to follow consumers on to mobile messaging and social networking services. Crucially, some of these services are now enabling businesses to transact, as well as interact, with customers, cutting the likes of Amazon and Google out of the loop entirely.

Largely pioneered by Tencent’s WeChat/Weixin service in China, the growing integration of digital communications and commerce services could be a multi-billion dollar boon for Facebook, the leading provider of digital messaging services in much of the world. The proportion of WeChat users making purchases through the service leapt to 31% in 2016 up from 15% in 2015, according to Mary Meeker’s Global Internet Trends report 2016. Moreover, users of WeChat’s payment service now make more than 50 payments a month through the service (see Figure 1), highlighting the convenience of ordering everyday products and services through a messaging app. In March 2016, Tencent reported the combined monthly active users of the Weixin and WeChat messaging services reached 697 million at the end of 2015, representing annual growth of 39%. See WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce for more on this key trend in the digital economy.

Figure 1: WeChat users find it convenient to combine payments and messaging 

Source: Mary Meeker’s Global Internet Trends 2016

 

  • Executive summary
  • Contents
  • Introduction
  • Google’s strategic headache
  • Winner takes all?
  • Google’s attempts to crack communications
  • Telcos’ long goodbye
  • RCS – a very slow burn
  • VoLTE sees broader support
  • Google and telcos: a match made in heaven?
  • A new phase in the Google-telcos relationship?
  • Building a business case
  • Conclusions
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • Next steps
  • Lay the foundations
  • What will Google do next?

 

  • Figure 1: WeChat users find it convenient to combine payments and messaging
  • Figure 2: Using Weixin Pay to complete a transaction in a fast food outlet
  • Figure 3: Leading communications & media sharing apps by downloads
  • Figure 4: Deutsche Telekom’s RCS app’s features include location sharing
  • Figure 5: All-IP communications services are gaining some traction with operators
  • Figure 6: Google Places aims to connect businesses and consumers
  • Figure 7: SWOT analysis of operators’ IP communications proposition
  • Figure 8: TOWS analysis for telcos in all-IP communications

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the rise of conversational commerce – the use of messaging services to enable both interactions and transactions. It considers how WeChat/Weixin has developed this concept in China, the functionality the Tencent subsidiary offers consumers and merchants, and the lessons for other players.

The report then goes on to consider how Facebook is implementing conversational commerce in its popular Messenger app, before outlining the implications for Amazon, Google and Apple. Finally, it considers how telcos may be able to capitalise on this trend and makes a series of high-level recommendations to guide the implementation of a conversational commerce strategy. This report builds on three recent STL reports, Building Digital Trust: A Model for Telcos to Succeed in Commerce, Mobile Authentication: Telcos’ Key to the Digital World? and Authentication Mechanisms: The Digital Arms Race.

Communications and commerce: two sides of the same coin

For Facebook, advertising isn’t the only fruit. When it hired the former head of PayPal, David Marcus, to run Facebook Messenger in 2014, it was a clear signal of where the social network is heading. Facebook plans to go head to head with eBay and Amazon in the digital commerce market, generating revenues by enabling transactions, as well as brokering advertising and marketing. The ultimate goal is to transform communications services into end-to-end commerce platforms that enable consumers and brands to “close the loop” from initial interaction through transaction to after-sales care.

Facebook is not alone. In fact, it is following in the footsteps of Tencent’s WeChat service. In the STL Partners’ Wheel of Digital Commerce (see Figure 1), the remit of WeChat, Facebook Messenger, Twitter, SnapChat and other digital communications services is expanding to encompass the guide, the transact and satisfy segments (marked in blue, turquoise and green), as well as the retain, plan and promote segments: the traditional sweet spot for social networking services, email and instant messaging.

Figure 1: Communications services move to facilitate the whole wheel of commerce

Source: STL Partners

Facebook, in particular, is following in the footsteps of WeChat, Tencent’s messaging service, which is evolving into a major digital commerce platform in its home market of China. Whereas email, SMS and many other digital commerce services have long carried commercial messages, together with advertising and, inevitably, spam, WeChat goes much further – it also enables transactions and customer care. The central tenet behind this concept, which is sometimes called conversational commerce, is that consumers will become increasingly comfortable using a single service to converse with friends and businesses, and buy goods and services. In some markets, third parties are adding a commerce overlay to existing communications platforms. In India, for example, several startups, such as Joe Hukum, Niki and Lookup, are touting ways to use WhatsApp, SMS and other digital communications services to transact with consumers.

For telcos, the growing integration of communications and commerce exacerbates a key strategic dilemma. Through voice calls and text messaging, telcos led the digital communications market for two decades, but now face ceding that market to over-the-top players using communications as a loss leader to support digital commerce. The question for telcos is whether to compete head-on with these players in both digital communication and commerce (a major undertaking requiring major investments in product development and marketing) or whether to fall back to just providing enablers for other players.

The final section of this report discusses this question further. But first, let’s consider the arguments as to why digital communications and digital commerce are natural bedfellows:

Markets have always combined commerce and conversations

Markets – essentially a concentration of vendors in one physical location – have been a feature of most societies and cultures throughout recorded history. They fulfil two key functions: One is to enable buyers and sellers to find each other easily. The second is to enable the exchange of information, news and gossip: the communications required to help human societies to function smoothly. For many shoppers, a visit to a physical market is as much about socialising, as shopping. In other words, communications and commerce have been intertwined for centuries. Messaging apps could extend this concept into the digital age.

Conversations help build trust

Communication is often a prelude for commerce. In both a personal and professional capacity, people often seek word-of-mouth recommendations or they canvas friends’ opinions on potential products and services. As consumers increasingly use communications apps for this purpose, these platforms are already playing a key role in purchasing decisions across both services and products. The obvious next step is to enable the actual transaction to also take place within the app.

Conversations can drive commerce

People use messaging apps to organise their social lives. They chat with friends about which bars to go to, which restaurants to dine at, which films to see, which concerts to attend and other entertainment possibilities. Once the decision is made, one of the group may want to book tickets, a table or a taxi. If such a booking can be made within the messaging app, all of the group will be able to see the details and act accordingly.

Convenient customer service

After a transaction is completed, customer service kicks in. The buyer may want to change an order, check on delivery dates or make a related purchase. The seller may want feedback. For younger generations growing up with the Internet, messaging apps represent a natural way to interact with customer service representatives.

Messaging has consumers’ attention

Although most smartphones host dozens of apps, few are used regularly. Messaging apps are among this chosen few. In fact, communications apps (social networks/messaging apps) soak up a huge amount of consumers’ time and attention. Data from comScore, for example, shows that social networks accounts for between one fifth and one quarter of all the time that consumers spend on digital services (see Figure 2).

Figure 2: Share of digital time of different categories of apps

Source:comScore

Merchants and brands need to go where their customers are and one of those places is messaging. Messaging apps are typically always running, frequently generating notifications. That means, for many consumers, a messaging app could be a convenient place from which to make purchases – it saves them the hassle of switching to another app or using a web browser. In an interview with Tech in Asia, Joe Hukum co-founder Ajeet Kushwaha noted: “Conversational commerce is going to offer Convenience 2.0 – better and bigger than Convenience 1.0 offered by e-commerce,” adding that Joe Hukum plans to make API (application program interface) integrations with a range of partners in order to enable quick transactions. “We’re at a point where the way we consume and transact is going to change drastically,” he contended.

The success of WeChat and the lessons it holds for other communications players suggests Kushwaha could well be right.

 

  • Executive Summary*
  • Communications and commerce: two sides of the same coin
  • WeChat – the conversational commerce trailblazer*
  • The merchant experience*
  • Muted monetisation*
  • Lessons to learn from WeChat/Weixin*
  • Facebook now following fast*
  • How much money can Messenger make from commerce?*
  • WhatsApp also targets commerce*
  • Takeaways: Facebook needs to work with the medium, not against it*
  • Implications for Amazon, Apple and Google*
  • Amazon – in danger of disruption*
  • Google – down, but not out*
  • Apple – already has the assets*
  • Conclusions and lessons for telcos*
  • How can telcos differentiate?*

(* = not shown here)

 

  • Figure 1: Communications services move to facilitate the whole wheel of commerce
  • Figure 2: Share of digital time of different categories of apps
  • Figure 3: The world’s most widely used mobile messaging services*
  • Figure 4: An example of a WeChat Subscription Account*
  • Figure 5: An example of a WeChat Service Account*
  • Figure 6: The key features of WeChat’s official accounts*
  • Figure 7: The main developer tools available to WeChat verified service accounts*
  • Figure 8: WeChat enables merchants to create a distinctive look and feel*
  • Figure 9: Some Chinese nurseries use WeChat to communicate with parents*
  • Figure 10: The WeChat Wallet offers easy access to a suite of services*
  • Figure 11: Tencent’s Red Envelope promotion was hugely successful*
  • Figure 12: WeChat’s depiction of a typical day for one of its users*
  • Figure 13: Tencent remains heavily reliant on online gaming revenues*
  • Figure 14: Facebook Messenger seeks to fill the gap in digital commerce*
  • Figure 15: Facebook follows in Tencent’s footsteps*
  • Figure 16: Hailing a taxi from within a conversation on Facebook Messenger*
  • Figure 17: Facebook Messenger will increasingly compete with Amazon Prime Now*
  • Figure 18: Telcos’ mobile money apps are becoming increasingly sophisticated*

(* = not shown here)

AT&T: Fast Pivot to the NFV Future

Objectives, methods and strategic rationale

AT&T publicly launched its plan to transform its network to a cloud-, SDN- and NFV-based architecture at the Mobile World Congress in February 2014. The program was designated as the ‘User-Defined Network Cloud’ (UDNC).

The initial branding, which has receded somewhat as the program has advanced, reflected the origins of AT&T’s strategic vision in cloud computing and the idea of a software-defined network (SDN) where users can flexibly modify and scale their services according to their changing needs, just as they can with cloud-based IT. This model also contributed to an early bias toward enterprise networking, with AT&T’s first major SDN-based service being ‘Network on Demand’: an Ethernet offering allowing enterprises to rapidly modify their inter-site bandwidth and make other service alterations via a self-service portal, first trialed in June 2014.

Data center-based infrastructure and SDN architectural principles have remained at the heart of AT&T’s vision, although the focus has shifted increasingly toward network functions virtualization (NFV). In December 2014, the operator announced it had set itself the target of virtualizing (NFV) and controlling (SDN) 75% of its network via software by 2020.  What this actually means was spelled out only in mid-2015, by which time AT&T also indicated that it expected to have virtualized around 5% out of the targeted 75% by the end of 2015.

What the 75% target relates to specifically are the 200 most vital network functions that AT&T believes it will need to take forward in the long term; so this is not an exhaustive list of every network component. The list comprises network elements and service platforms supporting IP-based data and voice services, and content delivery, ranging from CPE to the optical long-haul network and everything in between. What the list does not include is functions supporting legacy services such as TDM voice, frame relay or ATM; so the UDNC involves a definitive break with AT&T’s history as one of the largest and oldest PSTN operators in the world.

Correspondingly, this involves huge changes in AT&T’s culture and organization. The operator uses the term ‘pivot’ to describe its transformation into a software-centric network company. The word is intended to evoke a sort of 180o inversion of AT&T’s whole mode of operation: a transition from a hardware-centric operator that deploys and operates equipment designed to support specific services – and so builds and scales networks literally from the ground up – to a ‘top-down’, software-centric, ‘web-scale’ service provider that builds and scales services via software, and uses flexible, resource-efficient commodity IT hardware to deliver those services when and where needed.

AT&T has described the culture change needed to effect this pivot as one of the toughest challenges it faces. It involves replacing a so-called ‘NetOps’ (network-operations) mentality and team structure with a ‘DevOps’ (collaborative, iterative operations-focused software development) approach, with multi-disciplinary teams working across established operational siloes, and focusing on developing and implementing software-based solutions that address particular customer needs. According to AT&T Business Solutions’ Chief Marketing Officer, Steve McGaw, the clear parameters that the operator has set around the SDN architecture and customer-centricity are now driving team motivation and creativity: “A product that is going to fit into the SDN architecture becomes a self-fulfilling prophecy . . . . Because we have declared that that is the way we are going to do things, then there is friction to funding that doesn’t fit within that framework. And so everyone wants to get [their] project funded, everyone wants to move the ball forward with the customer and meet the customer’s needs and expectations.”

Allowing for some degree of marketing gloss, this description nonetheless portrays a considerable change in established ways of working, with hundreds of network engineers being retrained as software developers and systems managers. The same can be said for AT&T’s collaboration with third parties in developing the SDN architecture and virtualizing so many crucial network functions. AT&T is partnering with 11 vendors – both established and challengers – on the UDNC project, co-opting them into its dedicated Domain 2.0 supplier program. These vendors are:

  • Ericsson (multiple network functions, and also integration and transformation services);
  • Tail-F Systems (service orchestration: added to the Domain 2.0 program from February 2014 and then acquired by Cisco in July 2014);
  • Metaswitch Networks (virtualized IP multimedia functions, e.g. routers and SBCs);
  • Affirmed Networks (virtualized Enhanced Packet Core (EPC));
  • Amdocs (BSS / OSS functionality);
  • Juniper (routers, SDN technology, etc.);
  • Alcatel-Lucent (range of network functions);
  • Fujitsu (IT services);
  • Brocade (virtualized routers);
  • Ciena (optical networking and service orchestration);
  • Cisco (routers and IP networking)

In addition, in another challenge to AT&T’s traditionally proprietary mode of operation, the operator is collaborating extensively with a range of open source and academic initiatives working on various pieces of the SDN / NFV jigsaw. These include:

  • ON.Lab (a non-profit organization founded by SDN innovators, and specialists from Stanford University and Berkeley) – working on the virtualization of Central Office functionality (the so-called Central Office Re-architected as a Datacenter, or CORD) and the Open Network Operating System (ONOS) carrier-grade SDN platform. ON.Lab announced in October 2015 that it would partner with the Linux Foundation on open development of ONOS.
  • OpenDaylight (collaborative open source project hosted by the Linux Foundation, and dedicated to developing SDN and NFV technologies – various projects, including a tool based on the YANG data modeling language for configuring devices in the SDN)
  • OPNFV (another Linux Foundation-hosted open source project, focused on developing an open standard NFV platform – works mostly on the ARNO NFV platform).

AT&T’s Architecture – a technical summary

If you want to understand how this all fits together, consider the CORD project’s architecture as shown in Figure 1. CORD is an AT&T research project which aims to transform its local exchanges, Central Offices in US parlance, into small data centres hosting a wide range of virtualized software applications. As well as virtualizing the core telco functions based there, they will eventually also provide edge hosting for new products and services. The structure of CORD is the template for how AT&T intends to virtualize its network and how it intends to work with the three open-source groups ON.Lab, OpenDaylight, and OPNFV. Figure 1 shows how services are created in the XOS orchestration platform out of OpenStack virtual machines, OpenDaylight network apps, and ONOS flow rules.

Figure 1: How the Central Office Re-architected as a Datacenter project works

Source: ON.Lab

What’s the benefit?

This means that AT&T can …

 

  • Executive Summary* 
  • Objectives, methods and strategic rationale (shown in part here)
  • Progress and key milestones*
  • Analysis: proceeding on all fronts*
  • Next steps: getting it done*

(* = not shown here)

 

  • Figure 1: How the Central Office Re-architected as a Datacenter project works
  • Figure 2: NFV means re-organising your product bundles, which is one of the main reasons it’s worth doing*
  • Figure 3: AT&T’s publicly disclosed virtualized network functions (VNFs) as at October 2015*
  • Figure 4: What AT&T is concentrating on versus Telefonica*
  • Figure 5: Functions in line for virtualization by AT&T*
  • Figure 6: How AT&T is doing versus its primary competitor, Verizon in this space*

(* = not shown here)

Facebook + WhatsApp + Voice: So What?

Introduction

In 2010, we predicted in our analysis Facebook: Moving into Telco Space? that Facebook would inevitably decide to move further into the communications space in order to sustain and grow its valuation. In 2011 we published a major strategy report “Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon”, which charted the complex and inter-related battles and relationships between the main internet giants of the western world. It showed how they’re disrupting numerous fields, including communications, commerce, marketing – and not least each other.

In 2014 we’re launching an extension of this research into an ongoing stream of analysis on the key players to help strategists and senior decision makers navigate these complex waters. As a precursor, Facebook’s acquisition of WhatsApp shows further aspects of, and lessons from this ongoing disruption.

Market Context: two ‘killer apps’

Facebook: constantly chasing the audience

Facebook has already had to re-engineer its business model since the traumatic (and predicted) flop of the IPO. Users flocked away to mobile, and Facebook had to redesign its primary user experience in order to cope. At the same time, the advertisers who are Facebook’s real customers lost interest in the brand-building display pages that were its key advertising product.

Facebook chased the audience, developing new advertising products to fit into the context of a mobile user experience. It worked: post-IPO Facebook has succeeded in getting revenue from its mobile advertising, so much so that it made $523m in net profits on revenue of $2.6bn in Q4. But it’s worth remembering that this represents Facebook concentrating on one very specific niche business: mobile apps discovery.

In the last quarter, 53 per cent[1] of Facebook’s revenue, over $1bn, came from mobile ads. Mobile app downloads are becoming a very important segment of this. As Mark Zuckerberg said in the Q4 earnings call:

We’re finding that people also really want to buy a lot of app install ads, and that’s grown incredibly quickly and is one of the best parts of the ad work that we did over the last year

 

Sheryl Sandberg reiterated it later:

We are very excited about the mobile app space in general. If you look at our mobile app installation ads, we’ve really done a great job working with developers to help users discover and download their apps.

 

This is because app developers can expect to pay as little as $2 in advertising costs[2] for each install.

This is a significant change in the model. In Figure 1, the chart below, note especially that the mobile ads line of business starts immediately after the IPO in June, 2012, when ads in the News Feed were introduced, and accelerates further in early 2013, when mobile app ads were introduced.

Figure 1: Facebook’s rapidly growing mobile revenues
Facebook’s rapidly growing mobile revenues March 2014

This implies that revenue equivalent to roughly a quarter of app sales[1] through Apple’s iTunes App Store is going to Facebook just for ads, and much of it is advertising for apps. How long will Apple, whose app store it is, or Google, fundamentally an advertising business, put up with that before they launch something that competes?

The problem is summed up quite simply here:

“This exposes the strategic fallacy behind Facebook, which was the idea that there was going to be a monopoly on the social graph, and that Facebook was going to own it,” said Keith Rabois, a partner at venture capital firm Khosla Ventures. “That’s not true, and I don’t believe Facebook will constantly be able to buy its way out of this structural challenge.”

This pattern has been visible for a while. Rather than big multi-functional platforms, suddenly it seemed that leaner, focused, task-specific apps were in demand, notably Instagram, Snapchat, ask.fm, and Vine. It should come as no surprise that Unix-based iOS and Linux-based Android both seem to encourage app developers to do “one thing well” in the classic tradition of the core Unix/Linux utilities, with the unifying platform being the OS itself. So Facebook chased its audience again, buying Instagram.

Meanwhile, users sought out a new generation of mobile instant-messaging apps, which saw astonishingly fast growth and shocked the carrier industry with the hit to their SMS revenues. And Facebook has chased the audience again, with the WhatsApp acquisition.

WhatsApp: disrupting by doing one thing really well

WhatsApp’s user-base acceleration has been outstanding, as shown in Figure 2.

Figure 2: WhatsApp User Growth
WhatsApp User Growth March 2014

Source: Facebook

Its usage stats are equally impressive (Figure 3), as are the comparisons between WhatsApp’s and Facebook’s user engagement (Figure 4)

Figure 3: Average monthly minutes of use by market

Average monthly minutes of use by market March 2014

Source Mobidia May 2013

Figure 4: Average user screen time Facebook vs. WhatsApp (per month)
Average user screen time Facebook vs. WhatsApp (per month) March 2014

Source: Mobidia Q4 2012

WhatsApp is nothing if not a lean, focused, task-specific app that does one thing well. Its USP could be summarised as “instant messaging done right”. Its business model is simplicity itself, asking users for a dollar a year, rather than seeking advertisers or volume-billing. The simplicity, as with most simplicity, is founded on engineering excellence – WhatsApp holds the record for the most concurrent TCP sockets, 2 million, on a FreeBSD Unix server. It’s because they spent the time and money developing their highly customised fork of the open-source ejabberd XMPP server that they kept costs down to the level where their business model made sense. (There is much more information on WhatsApp technology in this High Scalability post.)

Across Europe, WhatsApp and the proliferation of other IM apps has dragged SMS pricing down until it has become a bundled, unlimited service. Vodafone, for example, bundles unlimited messaging with 1GB of data at its €29 price point.

While its appeal is not all about price, WhatsApp and other Over The Top (OTT) messaging apps capitalise on high priced markets, with much higher adoption in the markets with higher priced that we analysed in our recent Future Value of Voice and Messaging report (see Figure 5 below).

Figure 5: SMS Price vs. penetration of Top OSP Messaging Apps

SMS Price vs. penetration of Top OSP Messaging Apps March 2014

Source: Onavo, Ofcom, CMT, BNETZA, TIA, KCC, Telco accounts, STL Partners

But, as we point out in the report, price is only part of the story. Price drove the acquisition of customers, but quality retained them. WhatsApp offers a searchable, conversation-based chat history and a one-tap voice messaging function; it remains shocking to this day that it took Apple to show SMS messages as threaded conversations like e-mail.

 

  • Executive Summary
  • Analysis: one plus one equals…?
  • $19bn: a lot of money …or is it really?
  • Two Fundamentally Different Social Models
  • What does Facebook want to do with WhatsApp?
  • Conclusions: disruptors of the world, unite…
  • Facebook, the hub for social apps that scale?
  • Telcos: victory is empty but there are lessons in defeat
  • So what for the rest of the digital ecosystem?
  • STL Partners and the Telco 2.0™ Initiative

 

  • Figure 1: Facebook’s rapidly growing mobile revenues
  • Figure 2: WhatsApp User Growth
  • Figure 3: Average monthly minutes of use by market
  • Figure 4: Average user screen time Facebook vs. WhatsApp  (per month)
  • Figure 5: SMS Price vs. penetration of Top OSP Messaging Apps
  • Figure 6: Facebook’s share price March 2013 – February 2014
  • Figure 7: AT&T, Vodafone and Telefonica share prices Vs. Facebook
  • Figure 8: Voice and Messaging revenue scenarios

Communications Services: What now makes a winning value proposition?

Introduction

This is an extract of two sections of the latest Telco 2.0 Strategy Report The Future Value of Voice and Messaging for members of the premium Telco 2.0 Executive Briefing Service.

The full report:

  • Shows how telcos can slow the decline of voice and messaging revenues and build new communications services to maximise revenues and relevance with both consumer and enterprise customers.
  • Includes detailed forecasts for 9 markets, in which the total decline is forecast between -25% and -46% on a $375bn base between 2012 and 2018, giving telcos an $80bn opportunity to fight for.
  • Shows impacts and implications for other technology players including vendors and partners, and general lessons for competing with disruptive players in all markets.
  • Looks at the impact of so-called OTT competition, market trends and drivers, bundling strategies, operators developing their own Telco-OTT apps, advanced Enterprise Communications services, and the opportunities to exploit new standards such as RCS, WebRTC and VoLTE.

The Transition in User Behaviour

A global change in user behaviour

In November, 2012 we published European Mobile: The Future’s not Bright, it’s Brutal. Very soon after its publication, we issued an update in the light of results from Vodafone and Telefonica that suggested its predictions were being borne out much faster than we had expected.

Essentially, the macro-economic challenges faced by operators in southern Europe are catalysing the processes of change we identify in the industry more broadly.

This should not be seen as a “Club Med problem”. Vodafone reported a 2.7% drop in service revenue in the Netherlands, driven by customers reducing their out-of-bundle spending. This sensitivity and awareness of how close users are getting to their monthly bundle allowances is probably a good predictor of willingness to adopt new voice and messaging applications, i.e. if a user is regularly using more minutes or texts than are included in their service bundle, they will start to look for free or lower cost alternatives. KPN Mobile has already experienced a “WhatsApp shock” to its messaging revenues. Even in Vodafone Germany, voice revenues were down 6.1% and messaging 3.7%. Although enterprise and wholesale business were strong, prepaid lost enough revenue to leave the company only barely ahead. This suggests that the sizable low-wage segment of the German labour market is under macro-economic stress, and a shock is coming.

The problem is global, for example, at the 2013 Mobile World Congress, the CEO of KT Corp described voice revenues as “collapsing” and stated that as a result, revenues from their fixed operation had halved in two years. His counterpart at Turk Telekom asserted that “voice is dead”.

The combination of technological and macro-economic challenge results in disruptive, rather than linear change. For example, Spanish subscribers who adopt WhatsApp to substitute expensive operator messaging (and indeed voice) with relatively cheap data because they are struggling financially have no particular reason to return when the recovery eventually arrives.

Price is not the only issue

Also, it is worth noting that price is not the whole problem. Back at MWC 2013, the CEO of Viber, an OTT voice and messaging provider, claimed that the app has the highest penetration in Monaco, where over 94% of the population use Viber every day. Not only is Monaco somewhere not short of money, but it is also a market where the incumbent operator bundles unlimited SMS, though we feel that these statistics might slightly stretch the definition of population as there are many French subscribers using Monaco SIM cards. However, once adoption takes off it will be driven by social factors (the dynamics of innovation diffusion) and by competition on features.

Differential psychological and social advantages of communications media

The interaction styles and use cases of new voice and messaging apps that have been adopted by users are frequently quite different to the ones that have been imagined by telecoms operators. Between them, telcos have done little more than add mobility to telephony during the last 100 years, However, because of the Internet and growth of the smartphone, users now have many more ways to communicate and interact other than just calling one another.

SMS (only telcos’ second mass ‘hit’ product after voice) and MMS are “fire-and-forget” – messages are independent of each other, and transported on a store-and-forward basis. Most IM applications are either conversation-based, with messages being organised in threads, or else stream-based, with users releasing messages on a broadcast or publish-subscribe basis. They often also have a notion of groups, communities, or topics. In getting used to these and internalising their shortcuts, netiquette, and style, customers are becoming socialised into these applications, which will render the return of telcos as the messaging platform leaders with Rich Communication System (RCS) less and less likely. Figure 1 illustrates graphically some important psychological and social benefits of four different forms of communication.

Figure 1:  Psychological and social advantages of voice, SMS, IM, and Social Media

Psychological and social advantages of voice, SMS, IM, and Social Media Dec 2013

Source: STL Partners

The different benefits can clearly be seen. Taking voice as an example, we can see that a voice call could be a private conversation, a conference call, or even part of a webinar. Typically, voice calls are 1 to 1, single instance, and with little presence information conveyed (engaged tone or voicemail to others). By their very nature, voice calls are real time and have a high time commitment along with the need to pay attention to the entire conversation. Whilst not as strong as video or face to face communication, a voice call can communicate high emotion and of course is audio.

SMS has very different advantages. The majority of SMS sent are typically private, 1 to 1 conversations, and are not thread based. They are not real time, have no presence information, and require low time commitment, because of this they typically have minimal attention needs and while it is possible to use a wide array of emoticons or smileys, they are not the same as voice or pictures. Even though some applications are starting to blur the line with voice memos, today SMS messaging is a visual experience.

Instant messaging, whether enterprise or consumer, offers a richer experience than SMS. It can include presence, it is often thread based, and can include pictures, audio, videos, and real time picture or video sharing. Social takes the communications experience a step further than IM, and many of the applications such as Facebook Messenger, LINE, KakaoTalk, and WhatsApp are exploiting the capabilities of these communications mechanisms to disrupt existing or traditional channels.

Voice calls, whether telephony or ‘OTT’, continue to possess their original benefits. But now, people are learning to use other forms of communication that better fit the psychological and social advantages that they seek in different contexts. We consider these changes to be permanent and ongoing shifts in customer behaviour towards more effective applications, and there will doubtless be more – which is both a threat and an opportunity for telcos and others.

The applicable model of how these shifts transpire is probably a Bass diffusion process, where innovators enter a market early and are followed by imitators as the mass majority. Subsequently, the innovators then migrate to a new technology or service, and the cycle continues.

One of the best predictors of churn is knowing a churner, and it is to be expected that users of WhatsApp, Vine, etc. will take their friends with them. Economic pain will both accelerate the diffusion process and also spread it deeper into the population, as we have seen in South Korea with KakaoTalk.

High-margin segments are more at risk

Generally, all these effects are concentrated and emphasised in the segments that are traditionally unusually profitable, as this is where users stand to gain most from the price arbitrage. A finding from European Mobile: The Future’s not Bright, it’s Brutal and borne out by the research carried out for this report is that prices in Southern Europe were historically high, offering better margins to operators than elsewhere in Europe. Similarly, international and roaming calls are preferentially affected – although international minutes of use continue to grow near their historic average rates, all of this and more accrues to Skype, Google, and others. Roaming, despite regulatory efforts, remains expensive and a target for disruptors. It is telling that Truphone, a subject of our 2008 voice report, has transitioned from being a company that competed with generic mobile voice to being one that targets roaming.

 

  • Consumers: enjoying the fragmentation
  • Enterprises: in search of integration
  • What now makes a winning value proposition?
  • The fall of telephony
  • Talk may be cheap, but time is not
  • The increasing importance of “presence”
  • The competition from Online Service Providers
  • Operators’ responses
  • Free telco & other low-cost voice providers
  • Meeting Enterprise customer needs
  • Re-imagining customer service
  • Telco attempts to meet changing needs
  • Voice Developers – new opportunities
  • Into the Hunger Gap
  • Summary: the changing telephony business model
  • Conclusions
  • STL Partners and the Telco 2.0™ Initiative

 

  • Figure 1:  Psychological and social advantages of voice, SMS, IM, and Social Media
  • Figure 2: Ideal Enterprise mobile call routing scenario
  • Figure 3: Mobile Clients used to bypass high mobile call charges
  • Figure 4: Call Screening Options
  • Figure 5: Mobile device user context and data source
  • Figure 6: Typical business user modalities
  • Figure 7:  OSPs are pursuing platform strategies
  • Figure 8: Subscriber growth of KakaoTalk
  • Figure 9: Average monthly minutes of use by market
  • Figure 10: Key features of Voice and Messaging platforms
  • Figure 11: Average user screen time Facebook vs. WhatsApp  (per month)
  • Figure 12: Disruptive price competition also comes from operators
  • Figure 13: The hunger gap in music

The Future Value of Voice and Messaging

Background – ‘Voice and Messaging 2.0’

This is the latest report in our analysis of developments and strategies in the field of voice and messaging services over the past seven years. In 2007/8 we predicted the current decline in telco provided services in Voice & Messaging 2.0 “What to learn from – and how to compete with – Internet Communications Services”, further articulated strategic options in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon in 2011, and more recently published initial forecasts in European Mobile: The Future’s not Bright, it’s Brutal. We have also looked in depth at enterprise communications opportunities, for example in Enterprise Voice 2.0: Ecosystem, Species and Strategies, and trends in consumer behaviour, for example in The Digital Generation: Introducing the Participation Imperative Framework.  For more on these reports and all of our other research on this subject please see here.

The New Report


This report provides an independent and holistic view of voice and messaging market, looking in detail at trends, drivers and detailed forecasts, the latest developments, and the opportunities for all players involved. The analysis will save valuable time, effort and money by providing more realistic forecasts of future potential, and a fast-track to developing and / or benchmarking a leading-edge strategy and approach in digital communications. It contains

  • Our independent, external market-level forecasts of voice and messaging in 9 selected markets (US, Canada, France, Germany, Spain, UK, Italy, Singapore, Taiwan).
  • Best practice and leading-edge strategies in the design and delivery of new voice and messaging services (leading to higher customer satisfaction and lower churn).
  • The factors that will drive best and worst case performance.
  • The intentions, strategies, strengths and weaknesses of formerly adjacent players now taking an active role in the V&M market (e.g. Microsoft)
  • Case studies of Enterprise Voice applications including Twilio and Unified Communications solutions such as Microsoft Office 365
  • Case studies of Telco OTT Consumer Voice and Messaging services such as like Telefonica’s TuGo
  • Lessons from case studies of leading-edge new voice and messaging applications globally such as Whatsapp, KakaoTalk and other so-called ‘Over The Top’ (OTT) Players


It comprises a 18 page executive summary, 260 pages and 163 figures – full details below. Prices on application – please email contact@telco2.net or call +44 (0) 207 247 5003.

Benefits of the Report to Telcos, Technology Companies and Partners, and Investors


For a telco, this strategy report:

  • Describes and analyses the strategies that can make the difference between best and worst case performance, worth $80bn (or +/-20% revenues) in the 9 markets we analysed.
  • Externally benchmarks internal revenue forecasts for voice and messaging, leading to more realistic assumptions, targets, decisions, and better alignment of internal (e.g. board) and external (e.g. shareholder) expectations, and thereby potentially saving money and improving contributions.
  • Can help improve decisions on voice and messaging services investments, and provides valuable insight into the design of effective and attractive new services.
  • Enables more informed decisions on partner vs competitor status of non-traditional players in the V&M space with new business models, and thereby produce better / more sustainable future strategies.
  • Evaluates the attractiveness of developing and/or providing partner Unified Communication services in the Enterprise market, and ‘Telco OTT’ services for consumers.
  • Shows how to create a valuable and realistic new role for Voice and Messaging services in its portfolio, and thereby optimise its returns on assets and capabilities


For other players including technology and Internet companies, and telco technology vendors

  • The report provides independent market insight on how telcos and other players will be seeking to optimise $ multi-billion revenues from voice and messaging, including new revenue streams in some areas.
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others).
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving strategic insights into the objectives and strategies that telcos will be pursuing.


For investors, it will:

  • Improve investment decisions and strategies returning shareholder value by improving the quality of insight on forecasts and the outlook for telcos and other technology players active in voice and messaging.
  • Save vital time and effort by accelerating decision making and investment decisions.
  • Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors


The Future Value of Voice: Report Content Summary

  • Executive Summary. (18 pages outlining the opportunity and key strategic options)
  • Introduction. Disruption and transformation, voice vs. telephony, and scope.
  • The Transition in User Behaviour. Global psychological, social, pricing and segment drivers, and the changing needs of consumer and enterprise markets.
  • What now makes a winning Value Proposition? The fall of telephony, the value of time vs telephony, presence, Online Service Provider (OSP) competition, operators’ responses, free telco offerings, re-imaging customer service, voice developers, the changing telephony business model.
  • Market Trends and other Forecast Drivers. Model and forecast methodology and assumptions, general observations and drivers, ‘Peak Telephony/SMS’, fragmentation, macro-economic issues, competitive and regulatory pressures, handset subsidies.
  • Country-by-Country Analysis. Overview of national markets. Forecast and analysis of: UK, Germany, France, Italy, Spain, Taiwan, Singapore, Canada, US, other markets, summary and conclusions.
  • Technology: Products and Vendors’ Approaches. Unified Comminications. Microsoft Office 365, Skype, Cisco, Google, WebRTC, Rich Communications Service (RCS), Broadsoft, Twilio, Tropo, Voxeo, Hypervoice, Calltrunk, Operator voice and messaging services, summary and conclusions.
  • Telco Case Studies. Vodafone 360, One Net and RED, Telefonica Digital, Tu Me, Tu Go, Bluvia and AT&T.
  • Summary and Conclusions. Consumer, enterprise, technology and Telco OTT.

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

  • Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
  • Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
  • Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
  • Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
  • Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

The Great Game - Telcos, Amazon, Apple, Google, Facebook, Skype/Microsoft

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

  • Executive Summary [5 pages – including partial extract above]
  • Key Recommendations for telcos and others [20 pages]
  • Introduction [10 pages – including further extract below]


The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

  • Google
  • Apple
  • Facebook
  • Microsoft/Skype
  • Amazon

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents. 

 

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Figure 1 Chart Google Apple Facebook Microsoft Skype Amazon Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Figure 2 Chart Google Apple Facebook Microsoft Skype Amazon Market Capitalisation Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Figure 3 Chart Google Apple Facebook Microsoft Skype Amazon KPN Trends Sep 2011 Telco 2.0

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Figure 4 Chart Google Apple Facebook Microsoft Skype Amazon KPN Defence Sep 2011 Telco 2.0

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

China Mobile Services, Google, Apple, Facebook Report, Telco 2.0

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

 

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

[END OF EXTRACT]

 

Strategy 2.0: What Skype + Microsoft means for telcos

Summary: in theory, Microsoft and Skype have the resources, the brands, the customer base and the know-how to shape the future of telecoms and become a strategic counterweight to Apple and Google. Can they do it – and what should telcos’ strategy be? (June 2011, Executive Briefing Service, Dealing with Disruption Stream).

Microsoft Skype Logo Image Medium


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Introduction: Skype, the Original ‘Voice 2.0’

Everyone knows Skype as the original Voice 2.0 company – providing free phone calls, free video, status updates, all delivered using an innovative peer-to-peer architecture, and with the unique selling point of VoIP that just worked. This report describes its business model, technology strategy, its acquisition by Microsoft, and the consequences for the telecoms industry.

A little history

Founded in 2003 by Janus Friis and Niklas Zennström, Skype was acquired by eBay in 2005 for $2.6bn. eBay ownership was a period of stagnation – although eBay also owns PayPal, it only made half-hearted efforts to integrate the two. In November 2009, eBay sold 65% of Skype to an investor group led by Silver Lake for approximately $1.9bn in cash, valuing Skype at $2.75bn.

With Skype preparing for an IPO, Microsoft announced in May 2011 that it had agreed to buy the company for $8.5bn, giving the investor group a massive return and ensuring future potentially-disruptive start-ups will also attract plenty of funding. Many commentators have suggested that Microsoft is paying too much for the VOIP company, although the price-earnings ratio is actually no higher than that of Cisco’s acquisition of WebEx. So, what exactly is Microsoft getting for its billions? Let’s take a closer look.

A Dive into Skype’s Accounts

Microsoft has acquired what is essentially a global telephony company with 663 million registered users and very significant gross profitability. Skype contributed more net new minutes of international voice than the rest of the industry put together in 2010, according to Telegeography. Skype has never struggled to achieve growth, but its profitability has often been criticised, as has its ability to generate growth in ARPU. The following chart (figure 1) summarises Skype’s operational key performance indicators (KPIs) since 2006.

Figure 1: Skype’s KPIs: users, usage, and ARPU

Telco 2.0 Skype KPIs Users and ARPU June 2011 Graph Chart v1

Source: Skype’s S-1, May 2011

Questions have been raised about Skype’s performance in converting registered or even active users into paying users. This is critical, as ARPU is relatively flat. However, a monthly ARPU for paying users of $8 would be considered very reasonable for an emerging-market GSM operator and such an operator would tie up far more capital than Skype does. As all Skype users contribute to the system’s peer-to-peer (P2P) infrastructure, the marginal cost of serving non-paying users is essentially nothing.

Another way of looking at the KPIs is to consider their growth rates, as we have done in the following chart (figure 2). Although the growth of paying users is nowhere near as fast as that of free minutes of use, 40% growth per annum in revenue-generating subscribers is still very impressive.

Figure 2: Growth rates of Skype KPIs.

Telco 2.0 Skype KPIs Growth June 2011 Graph Chart

Source: Skype’s S-1, May 2011

In fact, there is very little wrong with Skype at the operating level. The following chart (figure 3) shows that, if we consider the primary challenge for Skype to be converting free users into paying users, it is actually doing rather well. Revenue and EBITDA are advancing and margins are holding up well.

Figure 3: Revenue and EBITDA growth is strong

Telco 2.0 Skype KPIs 5 Years Revenue and EBITDA June 2011 Graph Chart

Source: Skype S-1, May 2011

With 509 million active users available for conversion, ARPU may not be that relevant – just converting users of the free service into paying users has so far provided strong growth in gross profits and could do for the foreseeable future.

Figure 4: Conversion of free users at steady ARPU drives gross profit.

Telco 2.0 Skype Gross Profits June 2011 Graph Chart

Source: Skype S-1, May 2011

Skype doesn’t make money on free calls (not even from advertising or customer analytics/insights, yet), and has to pay interconnection fees and operate some infrastructure in order to provide SkypeOut (calls to conventional telephone numbers, rather than other Skype clients), and SkypeIn (calls from the PSTN to Skype users).

Skype sceptics have argued that eventually termination charges will catch up with the company and destroy its profitability. It is true that most of Skype’s revenues are generated (over 80%) by SkypeOut call charges and that Skype’s cost of net revenue is dominated (over 60%) by the cost of terminating these calls. However, termination as a percentage of Skype’s cost of net revenue is falling and Skype’s gross margin is rising, as its enormous volume growth enables it to extract better bulk pricing from interconnect operators (see Figure 5).

To see Figure 5, the conclusion of our analysis of Skype’s finances, and…

  • Is Skype Accumulating “Technical Debt”?
  • Future Plans: The Core Business, The Enterprise & Facebook
  • Telcos and Skype
  • Enter Microsoft
  • Windows Phone 7: Relevant again? 
  • Microsoft’s other mobile allies: Nokia, RIM
  • How Microsoft will deploy Skype 
  • Developers, developers, developers
  • Key Risks and Questions: execution, regulatory, partners, advertisers & payments
  • Answers: How Telcos should deal with Skype…and Microsoft

…plus these additional figures & fables…

  • Figure 5: How Skype’s spending is changing
  • Figure 6: Why Skype is making a loss
  • Figure 7: Commoditisation is for everybody!
  • Figure 8: 3UK benefits from its deal with Skype
  • Figure 9: Skype’s Deals with Carriers
  • Figure 10: Skype is a good fit for many Microsoft products
  • Figure 11: A unifying Skype API is critical for integration into the Microsoft empire
  • Figure 12: Telco strategy options matrix

 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 35 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, products and people referenced in the report: 3UK, AdSense, Android, Apple, AT&T, Au, Avaya, Ben Horowitz, BlackBerry Messenger, Cisco, Dynamics CRM, EasyBits, eBay, Exchange Server, Facebook, Facetime, Google, Google Talk, Google Voice, GSMA, Happy Pipe, Hutchison, iOS, iPhone, Jajah, Janus Friis, KDDI Mobile, Kinect, KPN, Lync, Mango, Marchex, Microsoft, Microsoft-Nokia deal, MXit, MySpace, Niklas Zennström, Nokia, Ofcom, Office Live, Outlook, PayPal, PowerPoint, Qik, RIM, Silver Lake, Skype, SkypeConnect, SkypeIn, SkypeKit, SkypeOut, SkypePhone, Steve Ballmer, Telefonica, Teredo, Tony Jacobs, Tropo, Twitter, Verizon Wireless, Virgin, Visual Studio, WebEx, WhatsApp, Windows Mobile, Windows Phone 7, WP7, Xbox, X-Series.

Technologies referenced: GSM, HD voice, HTTP/S, IM, IMS MMTel, IP networks, IPv4, IPv6, LTE, Mobile, NAT, P2P, PSTN, RCS, SILK V3, SIP, SMS, SS7, super node, URI, video telephony, Voice 2.0, VoIP, XMPP.