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Monday, May 16, 2011

Telcos paying OTT players - balance of payments will look ugly

Through my work with Telco 2.0, I spend quite a lot of time thinking about how telcos can get "two-sided business models" (2SBM) to work. This involves deriving revenues from companies "upstream" of the users themselves, who pay to use the operator as a "platform" for doing business with the users more effectively.

An easy example of 2SBM is advertising, with the telco facilitating a brand by helping it market to the telco's (paying) users. Google does much the same, but only monetises the upstream (ads) and not the downstream (users searching). Another example of existing telco 2SBM is "bill on behalf of" - for example collecting payment for apps through carrier billing, and taking a rev-share from the developer.

Harder examples of 2SBM are where the operator wants to act as an identity/authentication provider, enabling various network-based APIs like location, or where it wants to provide some form of QoS or "slices and diced" bandwidth for fixed or mobile broadband. Notwithstanding the ongoing wrangling about Net Neutrality, operators would dearly love to charge Internet companies such as Google or Facebook or Netflix for using "their pipes". As I've written before, simply acting as a bottleneck or tollgate is improbable - for any chance of getting "cold hard cash" for broadband 2SBM, the operators need to help the so-called OTT players do something extra, which best-efforts connectivity cannot do.

This is proving tricky, because the Internet companies have proven quite adept at making the most of ordinary Internet access connections, while the operators have found it hard to deliver "provable" enhanced QoS, especially in mobile, even where the law permits.

So at present, the amount of revenue flowing from to operators from YouTube, Hulu, eBay and so on is vanishingly small, once you exclude basic connectivity from their servers - and perhaps some newer trends about peering / transit for those generating the greatest volume of video. Many of these companies have developed their own in-house alternatives to operator APIs (location has been the easiest, but others such as messaging and identity are evolving too).

So despite some ridiculous, sycophantic and wishful-thinking "telcowash" (4MB PDF) from the likes of consultants such as ATKearney, the chances of deriving extra revenues from Internet companies, by just sitting in the middle of the network with a couple of DPI and optimisation boxes, seems as hard today as it did three years ago.

Instead, there's a slow trickle of cash going *the other direction*. Operators are paying OTT companies for their unique applications and capabilities. DoCoMo has just cut a deal with Twitter to embed its apps into featurephones, and use its "firehose" feed for location-based services. Verizon has partnered with Skype, as has H3G - something I feel might evolve much further now, given the Microsoft acquisition. Facebook is reportedly charging for bulk access to its own APIs - which makes those RCS visions of handset addressbooks injesting profile pictures and statuses look unlikely. And then we've had the acquisitions - France Telecom buying a major stake in local YouTube rival DailyMotion, Telefonica buying Jajah and so on.

And then of course there's the huge amount that operators spend on Google Advertising.

In other words, despite all the rhetoric, it seems like the OTT players are charging the telcos, not vice versa. The reason is simple - the OTT players are typically selling innovation and new value *first*, not attempting to monetise control. Enhanced Twitter will add value to DoCoMo's customers. Google's clever advertising and analytics help operators sell more stuff.

When the operators can demonstrate that their 2SBM offers add value (and revenue) to upstream players, especially on broadband, they are likely to buy them. But they are unlikely to pay a "control point tax" without upside.

How many operators employee marketing staff to show that they can help Facebook, Google et al make more money if they use the operator APIs or QoS mechanisms?

Until that point, the balance of payments between telcos and OTTs will stay in the red.


James Barnes said...

I'd bet my hind teeth that all those free Google Voice calls in North America terminating to PSTN/PLMN are running through Sprint and making the Operator a tidy penny.

Likewise Skype must be offloading terminations to both Verizon and 3.

Thousands of words written over the past week on how much the Operators will hate Skype/Microsoft - I think entirely the opposite, classic 2SBM opportunity - 3SBM if you include Nokia.

Dean Bubley said...

James - good point on telephony termination (and SMS as well). I'd forgotten about that, although there are probably a couple of VoIP wholesaler intermediaries in there as well.

Generally, SkypeOut terminations will be funded directly from Skype's own end-user revenues, but yes ultimately some will make its way to telcos' coffers.

I agree that Skype/Microsoft has the potential to be good for telcos, despite the apparent consensus that it's doom-laden. Firstly, Microsoft is a good deal more telco-friendly than having Google or Facebook buy Skype. Secondly, it's a backup plan if VoLTE doesn't work well. Thirdly there is potential for voice interconnect - although prices are coming down because of regulation.



David H. Deans said...

Given the fact that the two-sided business model concept has been around now for some time, surely there must be one broadband service provider (globally) that you can point to as a case study of how this model can work well in practice?

Who are the early adopters with a proven track record of success?