Telecom Italia s Solutions to address competition from OTT Players

Transcription

1 Telecom Italia s Solutions to address competition from OTT Players Issue 2 Welcome Research from Gartner: Market Trends: CSPs lay the foundation for their OTT strategies Telecom Italia s approach 11 About Telecom Italia Featuring research from

2 2 Welcome Paolo Murri - Head of Global Partnerships Program New opportunities are arising that can be more effectively tackled by cooperation: Telecom Italia through its Global Partnerships Program offers support and white label services to other CSPs aimed at gaining new market spaces in the new competitive scenario where different players are active. Telecom Italia, among other CSPs, has been developing specific strategies and solutions to position itself in the evolving ICT market that shows a highly growing role of OTT (Over The Top) players. The assumption of this document is that these solutions and strategies effectiveness will be enhanced through cooperation with other CSPs, which can benefit by strategy alignment and by reaching a higher scale in their service deployment. Interestingly, Telecom Italia (TI) has developed an initiative that can boost operator to operator collaboration: the Global Partnerships Program (GPP). Through this initiative, TI provides to CSPs of any scale and geography, through commercial agreements, the opportunity to leverage its investments in know-how and services for their benefit and for the industry as a whole. The first part of this document aims at describing various strategic approaches that CSPs take to position themselves, as well as some practical examples of solutions they have implemented. The second part is focused on Telecom Italia s approach and, more specifically, on some of the solutions that they have developed and that they are prepared to share with other players through GPP arrangements.

3 3 From the Gartner Files: Market Trends: CSPs lay the foundation for their OTT strategies Over-the-top players impact on communications service providers business varies according to their key characteristics and core offerings. We consider how CSPs can segment the OTT market into four main areas, and assess the merits and drawbacks of the five main strategic options available to them. Key Findings Ecosystem players become prominent with a core service and gradually extend their presence across the entire value chain. Their core competencies, assets and brand equity positions them well to assume the role of a communications service provider (CSP). Over-the-top (OTT) voice and messaging players are the biggest threats for CSPs. They affect CSPs core service revenue and margins by substituting traditional voice and SMS. Content streaming players place a CSP s network and resources under significant strain. Their presence requires CSPs to make capital investments in network upgrades and incur operational costs in traffic optimization. Contextual players grab consumer mind share and weaken the CSPs relationship with consumers. They also compete with CSPs in the monetization of customer data. Recommendations Do not consider all OTT players as a single uniform threat. Apply the segmentation model in the document to your own market to rapidly identify the players that constitute the biggest threats; and also those that can be candidates for partnerships. Assess the feasibility of each strategy in the context of your local market. It is futile to block an OTT player if the regulators in your market prohibit this. Be aware that use of either the competitive or collaborative strategy in the voice and messaging segment could result in the cannibalization of core service revenue. Also use of the same strategies in the contentstreaming segment will increase network pressure. Assess the impact of your chosen strategy on user experience and customer relationship carefully. While easier to implement, the reactive, aggressive and opportunistic strategies can negatively impact customer relationships. Introduction The explosion of affordable smartphones (often Wi-Fi enabled), coupled with inexpensive and widespread mobile broadband plans have paved the way for a new category of disruptive competitors in the telecom market OTT players. They affect CSP business in three main ways: they increase the load on the network; they lead to revenue decline by substituting core services with Internet Protocol (IP) alternatives; and they grab consumer mind share from CSPs. Most of these players can be grouped under four key segments, based on their characteristics and relative impact on CSPs business. CSPs have five main strategic options when dealing with OTT players. These strategies are not mutually exclusive and some CSPs can adopt a combination of approaches in any particular OTT segment. In this document, we define the four key OTT segments and lay out the five main strategic options for CSPs when dealing with OTT players. In Market Trends: CSPs Adopt Five Main Strategies In the Four Key OTT Battlegrounds, we show how different CSPs worldwide are mapping these strategies onto the four main OTT battlegrounds through a series of examples. Market Trend Most OTT Players Can Be Grouped Into Four Key Segments Based On Their Relative Impact on CSPs OTT services can take many forms video streaming, music streaming, IM, voice over IP (VoIP), personal cloud, location-based services, and so on. The majority of these services can be grouped under four main segments: ecosystem players; VoIP and messaging players; content streaming players and contextual players (as depicted in Figure 1).

4 4 Figure 1. The Four Key OTT Segments Amazon Alibaba Apple Skype Line WhatsApp Ecosystem Players VoIP and Messaging Players Google Baidu Microsoft Viber WeChat KakaoTalk OTT Players YouTube Dailymotion Netflix Facebook Renren Twitter Content Streaming Players Contextual Players Spotify Youku Deezer Layar Weibo Foursquare OTT = over-the-top; VoIP = voice over IP Source: Gartner (February 2013) In the next section, we will describe the key characteristics of these OTT segments and provide examples of players operating in each domain. 1. Ecosystem Players The ecosystem players often start with a core service (search-based advertising in the case of Google; e-commerce in the case of Amazon, and devices in the case of Apple) and gradually extend their presence across the entire value chain. While most of their revenue continues to come from their core offering, the launch of a broad range of strategic services complements and reinforces the core offering and helps lock the consumer into their ecosystem. This in turn helps to generate the self-sustaining network effects that are critical for the success of their business. These are the players that can eventually become de facto CSPs. Examples of global ecosystem players include: Apple, Google, Microsoft and Amazon. In China, we see players such as Baidu, Tencent and Alibaba moving into this segment. 2. VoIP and Messaging Players This segment has the highest impact on CSPs core service revenues and margins as exemplified by KPN s year-over-year revenue decline of nearly 10% as a result of WhatsApp s effect on its SMS revenue. Similarly, with 40 million users and presence on 100% of smartphones, KakaoTalk has become the prevailing messaging provider in South Korea. OTT voice and messaging services act as free substitutes for traditional voice and messaging services. They are destroying commercial value in the industry as the providers of such services barely generate any revenue. Examples of global VoIP and messaging players include: WhatsApp, Skype, Viber, Rebtel, Facebook, BlackBerry and Line. KakaoTalk and WeChat are strong players in the South Korean and Chinese markets, respectively. 3. Content Streaming Players The content-streaming players, especially the video providers, create significant strain on the network by sending huge amounts data to consumers. According to Allot Communications, video accounted for more than 40% of total mobile data traffic and video-streaming grew by more than 80% between 2011 and While these services do not directly affect core revenue, they necessitate significant capital investment in upgrading the network to sustain the load. CSPs also incur significant operational costs in optimizing video traffic. Examples of contentstreaming players include music-streaming providers such as Deezer, Pandora and Spotify;

5 5 and video-streaming providers such as Netflix, Hulu, Amazon Instant Video, Dailymotion, Youkou and LOVEFiLM. 4. Contextual Players The contextual players include a broad range of subcategories such as: social networking players, cloud service providers, location-based service providers, advertising companies and others. While many of these players seem inoffensive, their effect on CSPs originates from the way in which they grab consumer mind share and, as result, weaken CSPs relationships with consumers. The latter are now spending more time on social networks such as Facebook than on any other website or service. Several CSPs are planning to monetize customer data and customer insights. However, they will need to compete against the contextual players who also have vast amounts of consumer data. Contextual players with global reach include Facebook, Twitter, LinkedIn, Layar and Foursquare; whereas Weibo, Renren and Sina are very strong in their home market of China. CSPs Have Five Strategic Options When Dealing With OTT Players There are five possible approaches when dealing with OTT players in different segments: reactive, aggressive, opportunistic, collaborative and competitive (as shown in Figure 2). Globally, most CSPs adopt one or more of the five approaches. We analyze the merits and drawbacks of these five strategies. 1. The Reactive Strategy This strategy involves adopting internal measures such as traffic management, traffic optimization, throttling and Wi-Fi offloading to moderate the impact of OTT services, especially those requiring high bandwidth. Pros: This approach reduces the strain on the network and therefore delays the onset of network saturation and the need for additional capital investment in infrastructure upgrades. It does not require CSPs to invest in the management of partners or the development and promotion of new service initiatives. Cons: This strategy does not help with protecting core revenues or generating new service revenue. If implemented in an unsophisticated manner, it can lead to poor user experience and can affect the relationship with the consumer. Figure 2. CSPs Strategic Options When Dealing With OTT Players OTT VoIP and IM blocked Aggressive Websites supporting Google Ads blocked Launch of own-brand VoIP and IM services Competitive Launch of content services via investment and acquisition Traffic optimization Wi-Fi offloading Reactive Tiered price plans Throttling Skype with premium price plans only Opportunistic Own-brand content zero rated DCB in Google Play and Facebook App Center Collaborative Bundling of content services with price plans DCB = direct CSP billing; OTT = over-the-top; VoIP = voice over Internet Protocol Source: Gartner (February 2013)

6 6 Regulators in some countries frown upon the use of traffic management and certain aspects of traffic management are actually illegal in some countries. Examples of a reactive strategy: CSPs such as Orange (in the U.K. and France) and M1 (Singapore) are implementing traffic management on their networks. Peer-to-peer traffic is redirected during peak times or when there is network congestion. CSPs such as AT&T and Verizon have phased out unlimited data plans and introduced tiered price plans in conjunction with the launch of their LTE networks. They are also charging a higher price per megabyte once customers exceed their allowance in order to curb excessive usage. 2. The Aggressive Strategy The aggressive strategy involves blocking select OTT services. This strategy is not possible unless the regulators in a particular country allow it. Pros: This strategy, if applied to the VoIP and messaging players segment, halts voice and SMS substitution, thereby protecting CSPs core revenues. If content-streaming providers are blocked, it reduces the load on the network. In some cases, this strategy can be used by smaller CSPs as a negotiation tool against large OTT players (see the example involving Free and Google below). Cons: This strategy has a high dependency on netneutrality policies in a given country. CSPs that have adopted such an approach have often suffered significant consumer and media criticism. If all CSPs in a given market are not aligned, then the CSP implementing such an approach is likely to suffer significant customer attrition. Examples of an aggressive strategy: After significant lobbying from the three South Korean CSPs KT, SK Telecom and LG U+ the national regulator sanctioned the blocking of VoIP and messaging services such as Kakao Talk. Disruptive CSP Free (in France) blocked Google Ads for a few days in January 2013, to push for a change in peering agreements. These actions could resurface if the parties fail to reach an amicable resolution. 3. The Opportunistic Approach This approach involves charging consumers a premium for OTT services; for example, by only offering VoIP services with premium data plans. CSPs try to capitalize on the fact that consumers want these services, so are willing to pay a premium for them. CSPs also use the opportunistic strategy as a means to discourage consumer use of OTT services and make their own-brand service more enticing. Pros: This approach enables CSPs to generate new revenue streams and balance profit margins by charging more objectively for the amount of data that consumers are using. It can delay the onset of network saturation and slows down the rate of SMS and voice substitution. Some CSPs are also using this approach for positive discrimination in favor of their ownbrand services. Cons: This approach may lead to customer dissatisfaction, as customers may not be pleased with having to buy a more costly package to use VoIP and OTT messaging. Customers could also churn if other players in the market are not discriminating against OTT services. Examples of an opportunistic strategy: After a failed attempt to block Skype, the Nordic CSP TeliaSonera, now offers Skype but only with select data plans. Comcast prioritizes its Xfinity Streampix Internet TV traffic (at the packet level by tagging them) so that consumers perceive the quality as being significantly better than competing streaming services.

7 7 EE, the first CSP to launch 4G in the U.K., offers a movie-streaming service, EE Films, in conjunction with its 4G service plans. Content purchased from EE Films does not count toward users data allowance. 4. The Collaborative Approach This strategy involves partnering with select OTT players to develop a mutually beneficial relationship. The CSP leverages its core competencies (distribution channel, control over the network, customer insights, customer care) to promote and add value to the partners services. The business model is often a revenue share between both parties. CSPs are also experimenting with fixed or variable fees for offering OTT players services such as guaranteed quality of service (QoS), access to anonymized customer data and customer support. However, this business model has yet to take off. There are several levels of CSP-OTT collaboration, which range from simple partnerships to investments or joint ventures. A lighter form of collaboration can involve the CSP simply acting as an aggregator of OTT services. Pros: CSPs can offer consumers a broad service portfolio with minimal upfront investments (no design and development costs) and a faster time to market. They can also differentiate their service offering from their peers. They can acquire new customers (who are attracted by the OTT player s brand) and generate new revenue streams based on revenue share with the OTT player. Please note that revenue share deals vary significantly across the different OTT battlegrounds, While CSPs may earn up to 30% commission when partnering with music-streaming services such as Spotify, they can only aspire to a maximum of 5% when offering direct CSP billing services to Facebook. CSPs can differentiate the partner OTT player s services by providing additional value for example: direct CSP billing, customer care, marketing, guaranteed QoS. Cons: In this model, the OTT player s brand is often the consumer-facing brand, which means that the consumers are more likely to engage and identify with the OTT player rather than the CSP. Some OTT services have the potential to cannibalize the CSPs core services and increase the strain on the network, resulting in revenue decline and increased costs. Such partnerships are often not exclusive. This means that an OTT partner could be free to move to a competitor that offers a better deal, or possibly work with all CSPs in a given market. Examples of a collaborative strategy: Verizon s joint venture with Coinstar enables it to leverage the latter s content and advertising deals as well its media skills and expertise. It also enables Verizon to bring to market an online video-streaming service much faster. CSPs such as Telenor, Vodafone, NTT Docomo, AT&T and Verizon are hosting carrier channels in Google Play and offering direct CSP billing for apps and content sold via Google Play. T-Mobile in Germany and KPN in the Netherlands are bundling Spotify Premium with select data plans; while Orange is doing the same in conjunction with Deezer and Dailymotion. 5. The Competitive Approach This approach sees CSPs develop their own branded OTT services to compete against the established OTT players. They either develop the necessary expertise in-house or acquire a company with the relevant skills and know-how. Some of them may choose to outsource the services to white-label service providers (the CSPs then rebrand and sell these services as their own). Pros: The new digital services are marketed under the CSP s own brand or a new consumer brand is launched by the CSP. This enables the CSP to own the consumer relationship. Such an approach positions the CSP as an innovator and improves its brand equity. CSPs OTT services can help them expand into adjacent markets and have the potential to generate new revenue streams, resulting in growth. In addition, OTT services are often

8 8 not limited to CSPs own subscriber base. This means that CSPs can reach a much broader consumer base through OTT services. CSPs can leverage their core assets (control over the network, customer insight, customer care and distribution channels) to differentiate their OTT services from other offerings in the market. An own-brand OTT offering can help CSPs moderate customer migration to competitive offerings. Cons: Such an approach can be quite risky for CSPs as most of them do not have the software and IT skills to launch such services. The upfront investment for such an approach is quite high and the ROI is often unclear as the business models are very different to CSPs traditional business. The OTT landscape is extremely competitive and grabbing consumer mind share away from established OTT services will be very challenging. Consumers do not expect their CSPs to provide such services. Timing is of the essence when launching services that can cannibalize core revenue. If a CSP s OTT VoIP and IM services are brought to market too soon, they can accelerate the voice and SMS revenue decline. Examples of a competitive strategy: Tier 1 CSPs such as Telefonica, T-Mobile and Orange have all launched their ownbranded OTT communication services (TU Me, Bobsled and Libon, respectively) in the past 12 months. In addition, CSPs are working together to develop a competitive OTT communication service, Rich Communications Service (RCS), which is marketed under the joyn brand. CSPs in Spain and Germany were among the first to offer joyn to customers in 2012, followed by MetroPCS in the U.S. and the three South Korean CSPs. Other EU countries such as France, Poland and Romania are expected to follow suit in BCE is continuing its efforts to acquire Astral with a view to offering an online videostreaming service that can challenge Netflix. Likewise, the other Canadian CSP, Rogers is pursuing a TV Everywhere strategy through the acquisition of select media companies. Vendors to Watch Ecosystem player segment Most Tier 1 CSPs such as Vodafone, Telefonica, SK Telecom, Telenor, NTT Docomo, AT&T and Verizon are collaborating with Google on the customization of Android devices. However, Telefonica is also actively supporting the development of an alternative mobile platform, Firefox OS, which is expected to launch in Similarly, several of the aforementioned CSPs are supporting the Intel-led mobile platform Tizen, which is also expected to launch in VoIP and messaging player segment Tier 1 CSPs such as Orange and Telefonica have opted to launch their own branded competitive OTT messaging service in the mature markets of Western Europe. In parallel, they are supporting the RCS initiative (developed by Global System for Mobile Communications Association). CSPs in developing markets such as DiGi in Malaysia and Reliance in India, are partnering with WhatsApp to drive adoption of data services. Content streaming player segment Some CSPs such as KPN and T-Mobile have opted for a basic revenue share deal by partnering with popular music streaming player Spotify. Verizon has engaged in a cohesive relationship with partner, Coinstar, by entering into a joint venture with the latter; they will collaborate in the development and launch of a new video-streaming offer in the U.S. market RedBox Instant by Verizon. Contextual player segment Several CSPs such as TeliaSonera and Bharti Airtel are zerorating Facebook with select data plans and are also offering consumers the opportunity to share content via Facebook from their CSP-branded personal cloud service. However, there are also a number of CSPs such as Telefonica, StarHub and Verizon that have launched initiatives to monetize contextual data. Evidence Gartner conducted primary research via interviews with key stakeholders and secondary research with the help of Gartner s Secondary Research Services team. Source: Gartner Research, G , Gyanee Dewnarain, 21 February 2013

9 9 Telecom Italia s approach Strategy Telecom Italia s approach is headed towards identifying and exploiting the most interesting opportunities that the new scenario is offering to CSPs, rather than opposing or blocking OTT services. The strategy is centered on the maximization of overall ecosystem growth enabled by the new generation networks, with the clear view that OTTs and CSPs are structurally different and that both can leverage on different key assets, and can play complementary roles in a co-opetition expanding field. There is however a sort of Middle-Earth market arena that can be addressed by both CSPs and OTTs, where differentiation will play its role to define who will win the game in the next future. For TI a clear differentiator is the network infrastructure at the access, metro/regional and backbone level. The network, with all the functionalities, platforms, processes, people that ensure the constant quality, availability and reliability excellence is evolving into a basic element for over-the-network services, that only CSPs can effectively provide. Another key asset for CSPs is the customer base that is handled through multiple channels that are a distinctive value for CSP, not easily replicable by global OTT players. With reference to the analysis of the previous section, we could say that TI strategy it is a blend of collaborative and competitive approach aimed at improving service offering to the end users, as well as margins for its own operations. Solutions Telecom Italia has developed a number of services that are progressively occupying the Middle-Earth market arena and a selection of these is available on a white-label basis to other operators who wish to follow a similar approach. We will just mention: Cloud Services Telecom Italia s Nuvola Italiana (Italian Cloud) offers all the range of cloud services (IaaS, PaaS, SaaS) and has been defined as the Cloud with The Network Inside to highlight the capability of offering end-to-end services and support to Enterprises and PA through a centralized Control Room. TI has also developed Cloud Services for Small and Medium businesses and retail customers and it is offering them on a wholesale basis to national and international operators. Competitive implications: CSPs may differentiate from OTT players by offering Cloud services that have a unique, nonreplicable feature of end-to-end SLAs that include also the connectivity layer. Digital Television Cubovision from TI is a new personal and interactive TV, an Over The Top service and a multi-device offer available for TV (through an ad-hoc Set Top Box), Connected TV, PC, Smartphones, Tablets and Game Consoles. The offer is based on: Centralized platform, organized in different layers: ingestion layer, integration layer, access layer. Distributed service layer, based on a CDN (Content Delivery Network). A set of Customer Premises Devices suitable to receive, store and show video contents. Competitive implications: Cubovision is one of the first OTT, or better Over-The-Network digital television services launched by a CSP and with real multi-device support. Other CSPs may leverage this approach to compete against other players, including OTTs, with a cost effective and high quality solution that overcomes issues normally faced by traditional IPTV services. Wholesale Services: Telecom Italia is revising its peering policy aiming to rebalancing the IP data traffic flows with the ISPs that have a peer status to reduce the involved costs and also to establishing remunerative peering relationships introducing fees for traffic above a defined level, or for traffic with a differential and guaranteed quality level. Competitive implications: by offering a differentiated Quality of Service to interconnected players, CSPs are creating a new collaborative environment, where OTTs can offer premium services to their end-users, thus generating extra revenues that will be shared with the telco operators through these innovative wholesale services fees.

10 10 Global Partnerships Program Telecom Italia is one of the most successful Operators in Europe and Latin America and it has a long tradition of sharing know-how and collaborating in joint operations with affiliates and independent players. Through its Global Partnerships Program (GPP - Telecom Italia is offering to other operators worldwide the chance to share its strategies, approaches and operational solutions - including those mentioned above - thus paving the way to build a new win-win relationship with global and local OTTs through innovation and a proactive approach. A dedicated team is available to assess Global Partners needs and goals and select the most appropriate solutions or know-how that can enhance their competitive positioning and overall value. Unlike other companies and consultants, Telecom Italia involves in cooperation projects with other CSPs experts from its operational lines, that can offer highly specialized expertise and a highly pragmatic and effective approach. Source: Telecom Italia

11 11 About Telecom Italia With 45.6 million customers in Italy and 96.7 million in Brazil, Argentina and Paraguay, Telecom Italia is Italy s main ICT group and an important player on the Latin American market, which represents nearly 40% of the company s turnover in the first quarter of The company s range of offers - focusing on advanced solutions for consumers, businesses and institutions - includes: landline and mobile telecommunications, digital content, cloud computing, media, office and system solutions. The offers are provided by the Telecom Italia, TIM and Olivetti reliable and well-known brands. Attention towards the needs of its customers and technological innovation are at the base of the company s strategy. Telecom Italia has a dynamic organization which strives to provide quality service and is constantly involved in research in the TILab laboratories. Digital ubiquity - the possibility to be connected to the Internet at all times and to access information, services and multimedia content with ease and speed -, relies on Telecom Italia s integrated and technologically advanced mobile and landline networks. These can be accessed whilst on the move or from a fixed location thanks to a wide range of applications and devices such as: smartphones, mobiles, PCs, tablets, e-readers, over the top TV decoders, apps and cloud. The step from digital ubiquity for consumers to cloud services for businesses is a quick and easy one. Advanced and customizable solutions are dedicated to a diversified business environment: phone plans converging mobile and landline prices, high speed connectivity, an advanced platform for cloud computing for the virtualization of applications and infrastructures and finally a vast selection of applications for storing and managing data or controlling energy consumption. Abroad Group s focus is on Latin America. It operates in Argentina and Paraguay, providing fixed through Telecom Argentina group. In Brazil, TIM Brasil, with 71.2 million mobile lines and 27% market share, is the second player in the country. Group s key numbers in the first quarter million TIM lines in Italy, 71.2 million TIM Brasil customers 6.9 million retail broadband accesses in Italy 13.7 million retail connections to the fixed network in Italy 4.1 million fixed lines, 1.6 million broadband accesses, 19.1 million mobile customers in Argentina 2.3 million mobile lines in Paraguay 112 million km of copper lines and 4.6 million km of optical fiber lines in Italy 85,000 km of optical fiber in Europe and South America 82,941 employees, of whom 54,311 in Italy 878 million industrial investments (5,196 million in 2012) 6,796 million revenues (29,503 million in 2012) 2,672 million EBITDA ( 11,645 million EBITDA in 2012) Telecom Italia s Solutions to address competition from OTT Players is published by Telecom Italia. Editorial content supplied by Telecom Italia is independent of Gartner analysis. All Gartner research is used with Gartner s permission, and was originally published as part of Gartner s syndicated research service available to all entitled Gartner clients Gartner, Inc. and/or its affiliates. All rights reserved. The use of Gartner research in this publication does not indicate Gartner s endorsement of Telecom Italia s products and/or strategies. Reproduction or distribution of this publication in any form without Gartner s prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. The opinions expressed herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartner s Board of Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner research, see Guiding Principles on Independence and Objectivity on its website,