Enabling the OTT revolution: How telecom operators can stake their claim

November 14, 2013

Executive summary

As over-the-top (OTT) companies like Netflix, Skype, and Google encroach on the telecom industry, operators need to find ways to counter the threat. That means defending their territory against these new players or finding ways to work with them. Doing so requires that telecom companies put to use their distinct assets and capabilities: their ubiquitous fixed and wireless networks, their millions of customers, and the fully integrated customer data, logistics, and other services they can offer.

In our view, operators can employ three possible strategies. The first involves developing advanced connectivity services in order to defend their core networking and infrastructure business. The second requires that they create new services such as data analytics and billing, which they can sell to businesses in different verticals. The third, and the toughest of all, is to develop new apps and other services and offer them directly to consumers. None of these options are exclusive — operators need to consider and experiment with all of them. In all cases, the key is not for operators to fight against the OTT players but rather to find and develop the profit pools where their particular capabilities offer the greatest chances of success.

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The OTT battleground

The explosion of e-commerce, advertising, and digital media content that now travels over the networks of telecom players has created significant new value, but telecom companies themselves have been unable to benefit. Instead, that value has been largely captured by digital newcomers that have built successful business franchises “over the top” of the telecom operators’ networks. Think Skype, Google, Facebook, Amazon, Netflix, and PayPal, among many others.

Can operators turn this situation around? So far, their record is poor. Not one of them has been able to create an over-the-top (OTT) business that moves the needle on its top and bottom lines. A few companies, including Orange, Telefónica, and AT&T, have managed to build content and digital media franchises, yet these are still dwarfed by their core telecom businesses. And operators have been even less successful at capturing value in new services such as social media and apps.

At the same time, lean and nimble communication-over-IP (CoIP) players such as Skype are leveraging their “freemium” business models to capture the operators’ core voice and messaging revenue. Adding insult to injury, operators have had to make considerable investments in upgrading their networks to handle the ever-increasing flood of data created by the very OTT players that are cannibalizing their revenue. For instance, Netflix competes with operators’ IPTV/cable TV services, and is estimated to consume as much as a third of total network bandwidth in the U.S. during peak times.

Rather than looking for a solution within the traditional telecom business model and value chain, operators must ask themselves how they can capture a larger share of the value pools now being opened up through new technologies and business models in a variety of industry verticals. In doing so, they need to think carefully about the role they can best play in this fast-changing space.

Conclusion

The threat to telecom operators posed by OTT players is real, and operators need to consider how they plan to respond. In the long run, however, the two camps must understand that there’s a growing pool of value to be shared and that they need each other. Operators control the networks that enable OTT businesses, and as their core business matures and markets reach saturation, they need new revenue streams to keep funding the network expansion that the OTT companies need to thrive. And in launching the digital businesses of tomorrow, OTT players will need fast, intelligent networks that can form the basis for a wide range of new services and provide their customers with the best possible experience.

That’s why operators looking beyond the desire to protect their core business are best advised to consider the business enabler play, which depends for its success on creating value for OTT players to the benefit of all. Despite the challenges the operators face, they cannot afford to let the situation deteriorate into a win-or-lose proposition. To capture their share of the new value being created through digitization, operators need to adjust their world view, consider their position and preferred way to play in the OTT value chain, and develop the capabilities needed to win. And they need to move now.

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Enabling the OTT revolution: How telecom operators can stake their claim