Dominic Smith looks at the communications industry’s current obsession with over-the-top (OTT) services and argues that customers only really value the services they pay for.
In this industry, everywhere I go, everyone I talk to and everything I read seems to be focused on OTT services. And it’s all doom and gloom from the Communications Services Providers (CSPs) perspective. How can we compete with OTT providers? Why can’t we charge OTT providers for using our networks? We must block or throttle OTT services! We must own the customer relationship! We don’t want to be a ‘dumb pipe’! And so it goes on.
It is entirely understandable that CSPs are worried about their existing revenue streams as they continue to see a decline in traditional services such as voice. However, in any competitive market, price will always be under pressure and the OTT providers are merely adding to the competition and accelerating the decline in CSP margins. Incumbents will of course argue that OTT players are not always subject to the same regulatory system as the CSPs themselves, and this is true, but for the most part it seems to be a type of protectionism and a fear of the unknown which is driving this paranoia.
Five years ago the paranoia centred around Skype and other ‘free’ VoIP services. Now it’s the likes of Facebook, Google, Twitter, YouTube and ‘iPlayer’ type video services that are getting all the attention.
What is crucial to these OTT service providers is the business model that drives them forward. Google’s recent acquisition of Motorola Mobility was notable for the fact that it has increased the size of its workforce by around 65% – for all Google’s revenue (more than $29bn in 2010), proportionally they don’t actually have that many staff (circa 29,000 pre Motorola) compared with a traditional service organisation. This is because the majority of their business is focused around building technology and then using it to support ever more sophisticated advertising capabilities.
Google’s customers are actually the advertisers. These are the ones who pay and Google’s infrastructure and customer service organisation is setup accordingly. For the average Joe in the street who uses Gmail, YouTube, Search or any of their other services, there is no commercial relationship. The service is free. And if you have any problems, then good luck in finding a customer service rep who will be able to help.
Only recently I tried to update our company entry on Google Places, their free business directory, with our new office address. All appeared to be going well until the last stage of them sending me a PIN code to approve the update, whereupon I became stuck in a dead-end, unable to receive the PIN code by text message to a fixed telephone, but with no option to request the PIN code by any other method (post, email, etc). There’s no phone number or email address for customer support, only a knowledge base for advice from the rest of the ‘community’. I posted a question, received a few suggestions from other users, and then tried out various options even resorting to deleting the updated address and starting all over again. But all to no avail and hugely frustrating.
Don’t get me wrong, Google produce some brilliant applications that for the most part work perfectly, but I don’t directly pay anything for them. If Google imploded and these services were shut down overnight, it would be an inconvenience but it wouldn’t take me long to find an alternative. The same goes for Facebook and Twitter. However the story would be very different if my mobile service provider or home triple-play provider just disappeared. These are commercial relationships where I pay a certain amount of money and they are required contractually to deliver the corresponding service.
A commercial relationship has real value and this is what CSPs have in their favour. Ultimately customers are much more loyal to something that they pay for and CSPs need to use this to their advantage.
Free OTT services should therefore be much less of a concern to CSPs than the paid OTT services where a commercial relationship exists between the customer and the OTT service provider. We’ve already covered Netflix in a previous post here on the Cerillion blog, but this is a great example of a paid OTT service that customers seem to really value. It is also taking revenue away from the Cable/MSOs as their customers are choosing Netflix instead of various film packages, whilst impacting operator costs as it still needs their infrastructure to deliver the streaming movies. You could say a double-whammy.
However, both paid and free OTT services still provide great potential as new revenue streams for CSPs. For example, for an OTT service provider to charge its customers a premium, they need to be able to guarantee a certain quality of service and they can only do this through managed delivery partnerships with the CSPs who are carrying their services. Even for the ‘free’ OTT services, CSPs have an opportunity to partner and make the OTT service an integral part of their offerings, helping to create value in their data bundles and accelerating adoption of ever faster network services that can be charged extra.
Without the OTT providers, would CSPs alone be able to provide enough content / applications to drive this data services growth? I think the answer to this is clearly no. Similarly, OTT providers would not exist without the CSPs providing the bandwidth to deliver their services. The combination of CSP plus OTT is in fact expanding the total size of the communications services market and this can only be a good thing for all parties. CSPs must recognise that customers only really value the services they pay for, and then find the right OTT partnerships for their customer segments and to earn their share of the increased market size.