OTTs Value Killers for Telcos? Focus on African Operators

Transcription

1 OTTs Value Killers for Telcos? Focus on African Operators Version-N We make ICT strategies work 1

2 Executive Summary The current developments in the OTT market increase the pressure on operators. There is only a short window of opportunity to develop the right response strategy. 1 Innovation in the field of ICT products and services is significantly changing Global Data Usage human communication behavior and drives data usage on both fixed and Growth mobile networks, a challenge all Telco operators have to deal with. 2 3 The Operator Profitability Trap The Rise of OTT Players Global data traffic has exceeded voice traffic by far but the generated revenues can not (yet) cover the required network investments as OTT players claim an increasing amount of traditional Telco revenues for themselves. The globally growing number of OTT players with innovative business models is putting increasing pressure on Telco operators. The market for OTT services is expected to surpass the traditional Telco services market by the year A Regulatory Imbalance Remains As a new regulatory balance is not yet in sight, operators need to act quickly on their own to cater for these challenges and develop adequate OTT response strategies. 5 6 Definition of a Response Strategy Learning from best practices There is only a short window of opportunity for operators to elaborate a specific response strategy before their performance is significantly impacted by OTTs. Operators can choose between a Defend, Attack or a Cooperate Strategy. By carefully analyzing the strategies chosen by other operators around the globe, operators can draw upon best practices and benchmarks to support their decision making. 2

3 Content 1. Overview and introduction The drivers for fixed and mobile data growth The operator profitability trap 2. Trends and challenges 3. Possible scenarios for Telco operators 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 3

4 Overview and Introduction: The drivers for fixed and mobile data growth Innovation in the field of ICT products and services is significantly changing human communication behavior and drives data usage on both fixed and mobile networks. The drivers for fixed and mobile data growth Selected quantified data drivers Mobile Subscribers (in Million) TV Device Sales (in Million) +4% % % +128% % % % G / LTE 3G <3G Smart TVs Regular TVs M2M Connections (in Million) Active Videocall* Accounts (in Million) +16% % Source: IC Intelligence Centre (213) - TV Devices Forecasts Source: Ovum (214) - Mobile Subscription and Revenue Forecast Source: Ovum (213) - Global Cellular M2M Connections Source: Strategy Analytics (213) - VoLTE, OTT Voice & Video Call Forecasts 4 +% Compound Annual Growth Rate (CAGR) * e.g. Skype and Facetime

5 Overview and Introduction: The operator profitability trap OTT players evolve into the service providers of the future at the expense of Telco operators, pushed them into a severe data transport revenue and profitability trap. Revenue development in relation to traffic growth The Telco operator profitability trap Traffic: in Petabyte Revenue: Million US $ Minutes: Billion units Revenue: Million US $ Unit: Million US $ 3, 25, 2, 15, 1, 5, Shrinking margins EBIT negative EBITDA negative Mobile Network Traffic Fixed Network Traffic MNO Data revenues Mobile Voice Minutes (global) Mobile Voice Revenues (global) Revenues OPEX CAPEX + Depreciation The key challenges for Telco operators The Internet is evolving into an imbalanced media distribution platform (increasing downloads and stagnating uploads) Data traffic is growing exponentially and significant network investments are needed to meet the future demand The needed investments can not (yet) be recovered by data revenues and traditional voice revenues continue to shrink In addition, OTT players re-shuffle the market balance by focusing on the content offering, rather than on the traffic Operator profit margins significantly decrease over time and require innovative solutions to address these challenges Source: Analysis Mason (214) - Fixed network data traffic worldwide Source: Strategy Analytics (214) - Wireless Operator Performance Benchmarking Q

6 Content 1. Overview and introduction 2. Trends and challenges The rise of OTT players The rationale for OTT growth Categories of OTT services OTT player monetization strategies The impact of revenue squeezers The potential of revenue generators The current regulatory imbalance The need to develop adequate response strategies Operators at the crossroads 3. Possible scenarios for Telco operators 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 6

7 Trends and challenges: The rise of OTT players The number of OTT players that offer fully location-independent innovative services is constantly growing, attracting millions of subscribers with on a global scale. Source: Detecon Research OTT Landscape - Overview of the most dominant OTT players

8 Trends and challenges: The rationale for OTT growth OTT players are expected to surpass established Telcos in the long run by claiming the majority of revenues from services that are built on top of the operator s infrastructure. Development of global Telco and OTT services market (21 221) Unit: Billion US $ Telco Services Market % +53% (e) 6 OTT Services Market (e) (e) (e) (e) (e) The rationale for OTT growth The forecasted absolute growth rates highlight the changing relationship between traditional vs. future services OTT service revenues explode as: Services with a large customer base move from free to fremium or subscription based models OTTs expand and focus their services on mobile platforms, as the mobile penetration rates rise and usage behavior evolves The data analytics and business intelligence tools evolve, increasing advertisement funding This revenue explosion is built on the back of network operators, leaving them with network expansion costs to accommodate the data growth Operators will face severe profitability challenges in the future Source: IDATE - World Internet Services Markets 12/213 and Detecon Forecast (e) 8

9 Trends and challenges: Categories of OTT services OTT players offer a variety of services over Telco infrastructure. Telcos need to leverage the benefits of complementary services and constrain the impacts of destructive ones. Unit: Million US $ Breakdown of OTT Internet Services Market in 217* Cloud (excl. mobile apps) Search E-commerce (value added) Paid mobile apps (including games) Other ads (press, portals, etc ) Social Online games OTT video Music OTT VoIP The nature of OTT Services OTT services can be classified into different categories, according to their impact on traditional Telco Business Destructive Services, e.g.: Messaging Services such as WhatsApp, Line, etc. directly cannibalize SMS revenues VoIP Services, such as Skype or Viber directly cannibalize revenues, Revenue decline of international calls e.g. in high price regions like Africa Business calls substituted by collaboration software such as LYNC Complementary Services, e.g.: Online Gaming or Video can be complimentary to Telco business if data transport costs are covered Cloud Services are complimentary depending on positioning (e.g. hosted storage services) Source: IDATE - World Internet Services Markets 12/213 * Data for Messaging not reported via IDATE 9

10 Trends and challenges: OTT player monetization strategies The revenues generated by OTTs come from an intelligent mix of content delivery and advertisement, reducing the operators to mere infrastructure providers or dumb pipes. Revenue development from OTT services (21 217) in Million US$ +24% +398% OTT Video OTT VoIP +54% Social Network Paid revenues Social Network Advertising revenues OTT Monetization Strategies 1 OTTs focus on content distribution to monetize on subscription fees and advertisement revenues 2 By offering free services financed by targeted advertisements, OTTs quickly achieve a significant customer base which, in turn, drives ad. revenues 3 Integration with other OTT services and platforms increases the potential to cross-sell other high value products OTT Impact 1 High quality content and higher traffic push a heavy load on the network and shift the perception on the Quality of Service (QoS) offered by the bit pipe, i.e. the operator transporting the data 2 Most OTTs do not (or only partially) generate revenues from their services but harm operator s traditional ones 3 OTTs are viewed as the preferred service providers and no longer the operators Source: IDATE - World Internet Services Markets 12/213 1

11 Trends and challenges: The impact of revenue squeezers Voice, Messaging and Video OTTs can be seen as revenue squeezers, their services do not only impact traditional Telco revenues but pressure the network infrastructure. Voice and Messaging Services Revenue Squeezers Video / TV Services OTTs offering competing services with free(mium) business models or high capacity demanding services Video is expected to contribute the single largest portion of mobile data traffic, at over 7% by 216 Mobile messaging ~ 49,,6 bn US $ in SMS revenues lost to OTT players in 214 (globally) Greatly harming operator traditional revenue streams or resulting in heavy infrastructure investment to support QoS on OTT service Source: Ovum 11/13 Consumer VoIP Forecast Source: Ovum 9/13 Mobile Messaging Traffic and Revenues Forecast 11

12 Trends and challenges: The potential of revenue generators Several OTTs can be identified as revenue creators, as their digital business evolve and services get pushed into the market generating revenue streams unknown to operators. Social and e-commerce Services Revenue Creators Cloud, Games and Music Services OTTs offering innovative services with compelling business models based on Business Intelligence data Most of business models are driven by advertisement revenues built on the basis of customer profile knowledge Source: Detecon Research

13 Trends and challenges: The current regulatory imbalance The current trends and developments in the OTT universe causes regulatory authorities all over the world to struggle with the question of how to treat OTT players adequately. Growing Imbalance between Telecom and OTT universe Telecom Universe Heavily regulated industry Telco based standards (ITU) Limited/ slowing growth High pre-investment required Significant employer Moving towards IP Traditional business models OTT Communication Universe Limited/ no regulation Internet based standards (IETF) Rapid growth Low, scalable investment Limited direct employment IP based Disruptive models (free, freemium, ad based etc) Regulatory Challenge: Deregulation vs. Regulation of OTT? 13

14 Trends and challenges: The need to develop adequate response strategies As a new regulatory balance is not yet in sight, operators need to act quickly on their own to cater for these challenges and develop adequate OTT response strategies. Comparison of market conditions The need for action Regulation Licensing Licensed network operator Subject to license and license fee OTT player No service license required Network operator s business models are determined by regulatory requirements OTT Players are usually free of such limitations Quality of Service Interconnection SLAs are included in the service license Interconnection is mandated No quality requirements No interconnect requirements Current market setups have not yet adapted to the new competitive situation In addition, many Telco operators lack the necessary innovation speed and readiness and run into an innovation backlog against OTTs Universal Service Consumer protection Legal interception Usually subject to universal service obligation Subject to (enforceable) consumer protection policy Usually part of a license condition Not subject to univ. service regime No or little enforcement power Country dependent Results This causes competition to be highly dysfunctional to the benefit of the increasingly dominant OTT players The result is a significant loss of revenues in core services while costs for network expansion remain high Conclusion Taxation Subject to national tax regime Service dependent Operators need to act quickly to cater for these challenges as a new regulatory balance is not yet in sight. Source: Detecon Research

15 Trends and challenges: Operators at the crossroads Operators need to carefully decide how to deal with OTT players as their different types of business models may determine the sustainable future of operators business. Operators face a crossroad regarding OTT impact on their business OTT Business Models Profitability level over time Voice and Messaging OTT Perspective High Bandwidth Video Service deployment over time OTT Business Model Refinement & Maturity Strategic decision needed Operator Perspective OTTs business models develop at a fast pace and change the traditional revenue split Advertisement is the main revenue source of many OTTs. Paid subscriptions start to work for larger customer base OTTs Fremium apps have thrived as a innovative monetization strategy Cloud storage as an add-on service has ramped profitability Business Intelligence is the most powerful tool of content distributors Best-effort free services cannibalize traditional revenues Flexibility and innovation are the only way operators can monetize on future opportunities 15

16 Content 1. Overview and introduction 2. Trends and challenges 3. Possible scenarios for Telco operators Overview of applicable response strategies Assessment of adequate response strategies 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 16

17 Possible scenarios for Telco operators: Overview of applicable response strategies In principle, Telco operators can choose between three strategic directives to mitigate the impact of OTT players on their core business: Defend, Attack and Co-Operate. Overview of the most common response strategies for Telco operators DEFEND Strategy CO-OPERATE - Strategy Partner with OTT player(s) and benefit from service(s) CO-OPERATE - Strategy Invest in or acquire OTT player(s) and gain access to OTT service(s) Neutralize effect of OTT service(s) Response Strategies for Telco operators CO-OPERATE - Strategy Sponsored Data Approach OTTs subsidize user data ATTACK - Strategy Block OTT player(s) and service(s) ATTACK - Strategy Emulate service(s) of OTT player(s) 17

18 Possible scenarios for Telco operators: Assessment of adequate response strategies Both Defend and Attack strategies have implications on the value propositions towards the customers and should therefore be assessed carefully. Strategy DEFEND Strategy Neutralize effect of OTT service(s) on network ATTACK - Strategy Block OTT player(s) and service(s) ATTACK - Strategy Emulate service(s) of OTT player(s) Assessment Pro: Can reduce the usage of OTT services and content or stimulate purchase of additional capacity (download volume) beyond the usage cap Contra: Increased administrative efforts and decreased customer experience. Soft cap only reduces usage, but does not fully stop it Pro: This strategy may limit the up take of OTT services on a network and shift usage towards Telco services. Contra: Completely banning OTT services on a network or making these services unattractive by adding an additional fees can also cause customer dissatisfaction and churn Pro: If successful, emulated services can generate additional revenue streams or reduce the risk of losing revenues to OTTs Contra: Involves additional investments and time consuming R&D work with the risk of market failure due to strong position of established players Example(s) Telkom SA introduced soft cap for fixed BB data volume (2GB) AT&T, Vodacom, DT have soft caps on mobile BB plans AT&T and DT blocked Skype calls over 3G/4G network DT offers VoIP over 3G usage with special tariff China Telecom started proprietary messaging app. YiChat Several European and Asian operators launched joyn 18

19 Possible scenarios for Telco operators: Assessment of adequate response strategies As recent examples have shown, operators aim for increased co-operation with OTTs in order to leverage the additional revenue potential and expand their service portfolio. Strategy Assessment Example(s) CO-OPERATE - Strategy Sponsored Data Approach OTTs subsidize user data Pro: The increasing amount of OTT content on the network is paid for ( sponsored ) by the content provider and does not count towards the customer s data plan Contra: May create regulatory constraints and limitations in the context of the net neutrality discussion. Benefits large content providers (increased sponsoring) over small players AT&T recently launched sponsored data platform DT investigating a similar approach CO-OPERATE - Strategy Invest in or acquire OTT player(s) and gain access to OTT service(s) CO-OPERATE - Strategy Partner with OTT player(s) and benefit from service(s) Pro: Acquire OTT service and content providers to expand service base, get immediate access to (paying) subscribers, benefit from brand and secure revenues Contra: Depending on Service category, costly network upgrades are still required. ROI on OTT service questionable due to potential competition Pro: Access to OTT brand popularity can increase customer numbers and drive sales of data plans with high(er) ARPU Contra: Direct cannibalization of core services depending on type of partnership leading to revenue loss in specific segments Verizon acquired Intel Media, a business division developing Cloud TV products Airtel Nigeria and MTN Cameroon launch Whatsapp data bundle Vodafone UK bundles free Sky Go into LTE tariff 19

20 Content 1. Overview and introduction 2. Trends and challenges 3. Possible scenarios for Telco operators 4. Selected case studies Overview of selected African OTT players Overview of selected case studies Case Study 1 MTN Play Case Study 2 Airtel Nigeria and WhatsApp Case Study 3 Vodafone Qatar and Go by OSN 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 2

21 Selected Case Studies: Overview of selected African OTT players In Africa, a limited number of OTTs is still in a nascent phase with only few subscribers. Global players hold the dominant position and attract regional operators as partners. The Africa and Middle East OTT Landscape IC Flix Dubai based unlimited streaming platform Available in UAE and Neighboring countries Saya Ghanaen Messaging Provider - ~ Subscribers in 35 countries Key Advantage works on regular feature phones etv South African Video Provider - Currently ~ 12, unique viewers in South Africa using its e On Demand service Key Advantage: offers over-the-top video on-demand and OTT live TV Mxit South Africa Messaging Provider - ~ 7.5 Mio Subscribers worldwide Key Advantage works on regular feature phones Rationale All mayor Content Delivery Networks (CDNs) are still located in the USA, Northern Europe and South-East Asia The majority of content is still hosted outside of Africa, the are only a low number of Internet Exchange Points (IXPs) and therefore almost no local content Nascent local OTT providers such as Saya or Mxit are directly competing with well-established global players and have difficulties reaching a critical mass of users In addition, the primary OTT services in Africa still are low-bandwidth services such as messaging due to low penetration of broadband internet Satellite Television dominates the TV sector leaving, causing high market entry barriers for OTT Video providers 21

22 Selected Case Studies: Overview The following case studies were chosen to assess the impact of OTTs on African Telco operators and derive region specific strategies for operators based on current trends. Attack Strategy MTN play Cooperate Strategy Airtel Nigeria Cooperate Strategy Vodafone Qatar South Africa Nigeria Qatar OTT Video, Gaming, Music MTN creates the content platform MTN Play to reduce usage of OTT content and increase brand perception Subscribers get mobile access to content such as games, news wallpapers, ringtones, music, and videos MTN Play is now available to MTN subscribers in 22 Markets in Africa and the Middle East OTT Messaging Partnership between OTT messaging player WhatsApp and Airtel Nigeria Exclusive WhatsApp-branded mobile data plan from Airtel to compensate SMS revenue loss and increase brand perception The partnership has been extended regionally to other Airtel Markets (e.g. India) and to include other OTT platforms such as Twitter and Facebook OTT Mobile Video Vodafone Qatar has partnered with Go by OSN to give customers access to a large selection of movies and series The service is currently available on PC s and Macs, Smartphones and tablets and subscribers can take advantage of dual-device screening Vodafone is expecting to drive the update of its recently launched LTE service through this value proposition 22

23 Case Study I MTN Play

24 Case Study I MTN Play With presence in 24 countries and with mobile operations in 22, the MTN Group is the continent s leading provider of integrated ICT services in Africa and the Middle East. Selected MTN Mobile Operators MTN Nigeria Market share: 44.9% Number of subscribers: 57,224,316 Technology: 2G, 3G and WiMAX MTN Ghana Market share: 45.5% Number of subscribers: 13,54,981 Technology: 2G and 3G MTN Cameroon Market share: 6.7% Number of subscribers: 9,236, Technology: 2G and WiMAX MTN South Africa Market share: 33.5% Number of subscribers: 24,875, Technology: 2G, 3G and LTE MTN Group Footprint MTN Presence Mobile Network and/or ISP MTN subsidiaries chosen for case study analysis Operations: MTN Group Information Mobile operations in 22 countries ISP in 13 countries Subscriber information Total mobile subscribers: 16,785,231 (March 214) 3G subscribers: 25,277,615 (March 214) LTE subscribers: 5,76 (March 214) Financial (annual figures for 213 (US$)): Total revenue: $14.12 Billion Opex: $9.93 Billion Capex: $3.12 Billion EBITDA : $6.18 Billion EBITDA margin: 43.8% Source: TeleGeography GlobalComms Database March

25 Case Study I MTN Play In its largest markets Nigeria and South Africa, MTN faces strong declines in voice ARPUs and revenues but is expecting strong mobile growth rates across all markets. MTN Cameroon MTN Ghana MTN Nigeria Mobile Voice Revenues of selected MTN Markets* ARPU in US $ ARPU in US $ ARPU in US $ 5 n/a 211 4, ,79 5, , ,35 5, , ,96 4,92-4% 4,74 4,56 4, % 3, , , , % 5, , , , Revenue in Mio. US $ Revenue in Mio. US $ 1 5 Revenue in Mio. US $ MTN Cameroon MTN Ghana MTN Nigeria Mobile Data Revenues of selected MTN Markets* ARPU in US $ ARPU in US $ 211, , , % 2 1,13,29,46, ARPU in US $ 5 n/a %, , , , %, , , ,64, , , , , Revenue in Mio. US $ Revenue in Mio. US $ Revenue in Mio. US $ MTN South Africa 1 ARPU in US $ 5 9, , , Voice Revenues -14% 5,82 5,13 4, Voice ARPU 216 4, Revenue in Mio. US $ , , ,12 1,33 1,58 1, Source: Strategy Analytics 214, * Detecon Forecast for years Source: Strategy Analytics 214, * Detecon Forecast for years MTN South Africa ARPU in US $ Data Revenues % Data ARPU Revenue in Mio. US $ 2 1

26 Case Study I MTN Play The network infrastructure expansion needed for this mobile data growth hits MTN s EBITDA Margins, as CAPEX can not be recovered if most revenues flow to OTT service. Development of EBITDA and EBITDA Margin ( )* Rationale MTN Cameroon MTN Ghana MTN Nigeria MTN South Africa Margin in % Margin in % Margin in % Margin in % 29,9 226,69 237,36 48,3 47,8 45,2-3% 242, , , , ,53 42,8 254,31 41, ,22 4, ,7 38,9 39,2 39,6 4, 4, , , , ,8 +1% 214-3% , % , , , , , , , Source: Strategy Analytics 214, * Detecon Forecast for years EBITDA EBITDA Margin as % of Revenue EBITDA in Mio. US $ EBITDA in Mio. US $ EBITDA in Mio. US $ EBITDA in Mio. US $ MTN needs to significantly expand its network infrastructure in order to accommodate the growing demand for mobile data usage Mobile Data also accounts for significant revenue growth, but the majority of the content is provided by OTT players free of charge that freeride on MTN s network while benefitting from the direct customer interaction MTN acts as a bit pipe for OTT players while facing significant network cost (CAPEX + OPEX) that are increasingly difficult to recover To counter this trend, the MTN Group chose to develop its own content distribution network labeled MTN Play

27 Case Study I MTN Play MTN Play is a digital platform developed and operated by MTN which offers subscribers a variety of OTT content which they can access on multiple devices. Background MTN Play was launched in 29 in South Africa and expanded to other MTN markets MTN Play is currently offered in 21 out of the 22 countries in which MTN it has mobile operations MTN subscribers can access content which includes music, sports, news and information, applications, games, entertainment, social networking, as well as various streaming services (e.g. Mobile DVB-T) The content offered on MTN play is platformindependent and tailored to each MTN market with options such as local soccer team updates and local music available User downloads application / access via the internet Using MTN Play User subscribes to content / purchases once off A range of mobile handsets and operating systems, (basic feature phones to smartphones and tablets) is catered for by MTN Play The option of either subscribing to content or purchasing once off is possible Billing via deduction of airtime balance, voucher, mobile money etc. There is flexibility of cost to the subscriber as there are a variety of services to choose from Both prepaid and postpaid customers can use the service MTN Mobile Money, e-vouchers, loyalty points or airtime can be used to purchase content Source: Detecon Research

28 Case Study I MTN Play MTN holds the necessary market position to monetize on OTT content through MTN Play but needs to mitigate the risks resulting from the operation of its own platform. Increased Operational Expenditures (OPEX) for the initial development and constant maintenance of the MTN Play platform The investments into MTN play need to be backed by strong marketing initiatives to reach a critical mass of subscribers OTTs continue to provide attractive content free of charge resulting in a direct competition between MTN and OTTs In order to provide attractive content, partnerships with content providers need to be negotiated, more attractive content will be more expensive In addition, legal and regulatory constraints with regards to providing local content need to be taken into account specific local content needs to be sources individually per country MTN Play revenues are limited to MTNs subscriber base of currently ~ 16 Million users as external access to the platform is not possible MTN Risks MTN Benefits MTN shifts monetization of OTT content from OTT providers back to MTN by offering third party content and charging the subscribers based on their usage The resulting increased data usage translates into higher data revenues out of which MTN can achieve a larger share Strong USP compared to competitors by providing easy access to local content to a large target group (device independent) Synergies exist with other MTN products such as mobile money which can be used to pay for content Significant potential for customer analytics (data mining) that can contribute to targeted advertising Opportunity to partner exclusively with other service providers (e.g. current partnership with DSTV) Significant subscribers base due to MTN presence in 22 markets in CASA and MENA region Source: Detecon Research

29 Case Study II Airtel Nigeria and Whatsapp

30 Case Study II Airtel Nigeria and WhatsApp The Nigerian telecommunications market has the highest number of subscribers in Africa, with 4 major operators providing services to over 126 million active SIM cards. Overview of major Nigerian telco operators MTN Nigeria Total Number of Subscribers: 58,355,855 Mobile data Subscribers: 33,835,981 (Apr 14) Airtel Nigeria Total Number of Subscribers: 25,475,672 Mobile data Subscribers: 11,962,651 (Apr 14) Glo Mobile Total Number of Subscribers: 24,15,713 Mobile data Subscribers: 13,221,754 (Apr 14) Etisalat Nigeria Total Number of Subscribers: 19,111,664 Mobile data Subscribers: 6,793,54 (Apr 14) Country Information The Nigerian mobile market is the largest in Africa by subscribers, boasting over 126 million active cellular users at the end of April 214 Country size km²: 923,768 Total population: 174,57,539 (213) Active Mobile Sims: 126,958,94 (214) Teledensity : 92.42% Communications Regulatory Body: Nigerian Communications Commission (NCC) Total Mobile Data Subscribers: 65,813,89 (Q1 214) Total Voice Revenue: $ 7,253m (213) Total Data Revenue: $ 1,352m (213) GDP 213 (USD Billion): $ GDP per capita 213 (USD): $1,7 Source: Nigerian Communications Commission (NCC) Industry Overview 214 Source: TeleGeography GlobalComms Database 214 Pyramid research Mobile Forecast Q

31 Case Study II Airtel Nigeria and WhatsApp Airtel Nigeria was the first mobile operator to roll out GSM services in the country, now having the 2 nd largest subscriber base with 28.6 million customers. Business Description Airtel Nigeria was the first mobile operator to roll out GSM services in the country in 21 (2 days before MTN) The company was originally founded as Econet Wireless Nigeria in 21, named after the South African holding company Econet Wireless which held a 5% stake and a contract to run the Cellco After several changes of ownership, Zain Group approved an offer for the majority of its African assets by Bharti Airtel in June 21. The Cellco was rebranded under the Airtel moniker by the end of 21 Court cases between Econet and Bharti Airtel about Econet s remaining 5% share of ownership are still ongoing In April 214, Airtel Nigeria revealed it had invested over USD1.7 billion to expand network capacity and improve network and service quality since Bharti Airtel took over in 21 Airtel Nigeria plans to launch LTE in 215. Trial tests were run successfully in Lagos mid December 212 with plans to increase 4G coverage to other major cities Airtel Nigeria s subscriber base only recently surpassed Nigeria's second national operator (SNO) Globacom in the first quarter of 214, turning it into the 2 nd largest operator in the country, behind MTN Nigeria ARPU in US $ Airtel Nigeria Revenue and ARPU Development 6, Number of Subscriptions and Market Share (m,%) , % 5, % 4, Revenues ARPU % % 4, % 215 4, % 216 3, % 217 Revenue in Mio. US $ Market share Connections Source: GSMA 214,Telegeography 214, Detecon Analysis

32 Case Study II Airtel Nigeria and WhatsApp With the expected uptake of OTT voice and messaging users in Nigeria, SMS traffic on Airtel s mobile network as well as SMS ARPUs are expected to decrease. Nigerian OTT Voice xxxxxxxxxxxxxxxxx and Messaging users (millions) Selected quantified data drivers OTT Users in Million Voice Messaging +43% Voice Services ARPU in US $ n/a 211 5, , , % 5, , , Revenue in Mio. US $ Development of SMS Traffic on Airtel Nigeria Network SMS Traffic in Million % Data Services SMS Services ARPU in US $ ARPU in US $ n/a 211 n/a 211, , , , , ,26 +52% -2% 1, ,26 1, ,25 2, , Revenue in Mio. US $ Revenue in Mio. US $ 1 5 Source: Analysys Mason OTT worldwide forecasts 213, * Detecon Forecast for years Source: Strategy Analytics 214, * Detecon Forecast for years

33 Case Study II Airtel Nigeria and WhatsApp By partnering with WhatsApp, Airtel intends to reduce the negative revenue impact of OTT messaging by monetizing WhatsApp usage through specific tariff plans. Airtel Nigeria and WhatsApp partnership Airtel Nigeria WhatsApp and WTF bundle tariffs Airtel Nigeria s partnership with WhatsApp Inc. offers all Airtel prepaid subscribers a WhatsApp branded data plan that provides unlimited access to WhatsApp usage for a monthly subscription fee This partnership is a first in Nigeria and is currently exclusive to Airtel Subscribers who activate Airtel data bundles of 2MB or more (up to 15 GB per month) also get unlimited access to WhatsApp messaging without having to pay for WhatsApp usage via deduction of airtime All core WhatsApp features are included in the bundle: Instant messaging and Multi-user messaging File sharing Location sharing Message broadcasting Audio messaging Airtel also provides a WTF (Whatsapp, Twitter and Facebook) bundle that offers unlimited access to all three OTT platforms Source: Detecon Research Monthly subscription fee for Airtel WhatsApp bundle is: 1 Nigerian Naira (.62 US $) Monthly subscription plan for 2MB, which includes unlimited WhatsApp usage, (i.e. Usage is not taken off data volume) is: 1, Nigerian Naira (6.14 US $) Monthly subscription fee for Airtel WTF bundle is: 2 Nigerian Naira (1.23 US $) For WhatsApp activity after expiration of bundle subscription, Airtel customers will be billed based at Pay as you use rates of 5kobo (.3 US $) per Kilobyte

34 Case Study II Airtel Nigeria and WhatsApp The WhatsApp bundle may not be able to fully compensate shrinking SMS ARPUs but Airtel is expected to benefit from the improved brand perception through the partnership. Direct cannibalization of traditional SMS revenues as unlimited WhatsApp usage can be subscribed on a monthly basis for ~.62 US $ (1 Naira) whereas 2 SMS (to all operators within Nigeria) are sold on a package price basis of ~ 1.2 US $ (2 Naira) Lack of targeted advertising opportunities as WhatsApp explicitly does not gather user data for customer analytics purposes and ad selling Depending on uptake of WhatsApp bundle, data traffic on Airtels network could increase significantly, particularly if WhatsApp is used for sharing media such as pictures Cost of partnership, e.g. paying license fees to WhatsApp for exclusive advertisement of the Airtel cobranded service Due to the No Advertising policy of WhatsApp, the explicit marketing of the partnership is one-sided (Airtel only) and thereby reaching a reduced audience Airtel Nigeria Risks Airtel Nigeria Benefits Improved brand perception due to marketing of Airtel and WhatsApp as unique and exclusive partnership Stronger USP compared to Airtel s local and regional competitors such as MTN, Glo or Etisalat Unlimited WhatsApp usage (outside of tariff plans with more than 2MB per month) can be used as a sales argument for up-selling of higher value tariff plans to existing customers Increase in subscribers numbers due to attractiveness of OTT social messaging bundles Expansion of WhatsApp partnership into other Airtel markets such as India with significantly larger subscriber base The partnership can facilitate the expansion of the WhatsApp bundle to include other OTT Services such as Twitter or FaceBook ( WTF Bundle ) or even other platforms in the future Source: Detecon Research

35 Case Study III Vodafone Qatar and Go by OSN

36 Case Study III Vodafone Qatar and Go by OSN The Qatari telecommunications market develops in an incredibly fast pace with sky-high penetration rates. Two operators run to differentiate and introduce new services. Overview of major Qatart telco operators Country Information Ooredoo Total Number of Subscribers: 2,593,327 Mobile data Subscribers: 1,75, (Apr 14) Vodafone Qatar Total Number of Subscribers: 1,327, Mobile data Subscribers: 765, (Apr 14) The Qatari mobile market is already highly developed, experiencing over 2% penetration with 5% of data connections Country size km²: 11,437 Total population: 1,9, (213) Active Mobile Sims: 3,92,327 (214) Teledensity : 23.% Communications Regulatory Body: Supreme Council for Information & Communications Technology (ictqatar) Total Mobile Data Subscribers: 1,84, (Q1 214) Total Voice Revenue: $ 643.9m (213) Total Data Revenue: $ 153m (213) GDP 213 (USD Billion): $ GDP per capita 213 (USD): $98,8 Source: TeleGeography GlobalComms Database 214 Source: Analysis Mason

37 Case Study III Vodafone Qatar and Go by OSN Mobile is a key driver for OTT video demand, Smartphones are significantly driving daily video usage and OTT take-up in the entire Middle East and North Africa (MENA) region. Background Information Video viewing on handsets is common in MENA. Surveys show that more than 6% of subscribers in developed MENA markets with data-enabled handsets use mobile video Consumption of free OTT content is more prevalent than paid content, such as catch-up TV. YouTube usage reported by Google showed that playbacks in the region doubled y-o-y Local OTT providers have also gained traction. Istikana, an OTT video provider with a freemium model, reached 1 million visits within 4 months of launching its service in March 211, and has exceeded 1, users a day, after expanding its support to include portable devices, such as tablets Increased take-up of Smartphones is encouraging mobile Internet users in MENA to use data-driving services such as video As OTT players move from a free ad-supported to a paid model, they are likely to rely on operators support to distribute and monetise content Operators need to prepare their infrastructure and position the services attractively (for example, as part of data bundles) to increase the likelihood of consumers paying for them The video formats are demanding in terms of both bandwidth and capacity, so operators need to deploy networks that can deliver this level of performance and maintain an acceptable level of quality of service Penetration rate in % Fixed Broadband Connections in MENA Connections 211 Mobile and Smartphone Penetration in MENA Mobile +16% 212 DSL Fiber Smartphones Source: Detecon Research 214 Source: Analysis Mason 214; TeleGeography GlobalComms Database

38 Case Study III Vodafone Qatar and Go by OSN MENA s OTT video landscape differs from the rest of the world, as local players have had room to grow without intensive pressure from established international players. MENA OTT Video Landscape Multi Access Source: Analysis Mason,Telegeography 214, Detecon Analysis The media content creation and distribution market in MENA is dominated by a relatively small number of satellite TV broadcasters (such as MBC) and pay-tv providers (such as OSN) In the absence of competing international OTT providers such as Netflix, these large regional media groups have used OTT to consolidate their market dominance A new breed of home-grown OTT players has also emerged during the past 4 years. These companies use cloud-based streaming and storage capabilities to quickly deploy digital aggregation and distribution services. These players have managed to quickly reach consumers across the whole region using the web as the distribution platform, and targeting niche segments These emerging OTT players are increasingly making their services accessible from a variety of devices, such as mobile handsets, tablets and smart TVs, because they have recognised the importance of delivering a multi-screen experience The integration of social networking features such as recommending and sharing helped attract MENA s (mostly young) mobile and online users Most of these services are freely accessible (with advertising support), but there is growing interest in building sustainable business models based on subscription fees

39 Case Study III Vodafone Qatar and Go by OSN The Qatari demand for advanced data offering can already be observed from the uptake of new services and technologies. Video services are a clear path towards revenue rise. Qatari xxxxxxxxxxxxxxxxx Mobile Users (millions) Video Demand on Qatari Market Q Q Q Q Q Q Q Q14 4G 3G 2G Data Share in % % Introduction of OTT Video Offerings (Go by OSN) +3% Revenues in Mio. US $ Connection Type (millions) Data Revenues Data Share of Total Revenues Prepaid Postpaid Connections in Broadband Connections +25% IPTV Connections Source: Analysys Mason Source: Analysis Mason 214, * Detecon Forecast for years

40 Case Study III Vodafone Qatar and Go by OSN Vodafone has found in OSN an opportunity to differentiate and attract costumers to its newly deployed 4G network. OSN brings the benefits of a establish media corporation. Vodafone and Go partnership Vodafone has partnered with Go by OSN to give customers access to a huge selection of movies and series The partnership is beneficial to Vodafone since it works with an experienced local partner which holds a large media portfolio (content) and network The content available reaches out to the Arab nationals as well as to international viewers This service has been made available with the rollout of Vodafone s 4G network in the country, clearly indicating the necessity for investment to support such data-intense applications Paulo Ferreira, Head of Commercial and Digital, OSN, stated that: We launched Go by OSN last month and the response has been overwhelming. There is no other service in the market that has multiple Hollywood studio deals which enables Go to play host to the most critically-acclaimed and diversified Western and Arabic content. Coupled with Vodafone s seamless 4G network Vodafone Tariffs and Plans Go, OSN s online TV service, offers Qatar residents access to entertainment including Hollywood blockbusters, local Arabic productions, award-winning TV series and popular kids content. The service is currently available on PC s and Macs, smartphones and tablets and subscribers can take advantage of dual-device screening With up to a 6 month trial followed by QR37 (1.16 US $) a month, customers choosing Go by OSN can access over 5 movies, 15 series and over 1 kids and family shows Subscribers can also enjoy up to 8 GB of FREE video streaming from Go by OSN every month Source: Detecon Research 214 4

41 Case Study III Vodafone Qatar and Go by OSN The partnership shows to be promising as it taps a market demand just at the event of a 4G introduction, expected to offer a good service with an acceptable mobile QoE. Vodafone needs to strategize on the business model evolution as it needs to assure the return on its investment for the newly deployed 4G network The price per MB is not likely to grow but the traffic will grow at a fast pace, nevertheless this might not be sufficient to push profitability up Using a partner as OSN can provide access and expertise which is currently not in place at Vodafone, but the right interaction points and knowledge transfer need to take place The magnitude of data explosion with innovative services has been always unpredictable and the demand for it can overload the new network and push for unforeseen investments The partnership could trigger Ooredoo to also negotiate and launch a similarly attractive partnership and overtake Vodafone in this segment, due to its significantly larger existing subscriber base Vodafone Qatar Risks Vodafone Qatar Benefits The new video service offering bundled with the 4G network is an important step to attract new customers and to differentiate itself from the market leader Ooredoo The choice of OSN as a partner brings many benefits as it is already an established company in the media business and holds a wide network of partners itself The extended portfolio which covers both the Arab and international content is very appealing to a market like as Qatar with its large population of expatriates Since international OTT media players are not entering the Arab markets, the service can experience a controlled growth and adapt to the demands of the region Video services has shown to be one of the top demands from the MENA region which will clearly have a positive impact on (mobile) data usage Through a smart business model Vodafone can greatly benefit and monetize from this partnership with OSN. It also opens doors for smart bundles in case Vodafone grows a fixed access network in the future On the group level, Vodafone can use the experience gained in Qatar to roll-out similar partnerships in other subsidiaries Source: Detecon Research

42 Content 1. Overview and introduction 2. Trends and challenges 3. Possible scenarios for Telco operators 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 42

43 Our Approach Detecon proposes a phased approach to assess the impact of OTTs on the business of our clients and develop an actionable response strategy tailored to their needs. Detecon s project approach Competitive Analysis and Trend Scouting Quantify impact of OTT services on core business and identify both revenue squeezers and creators Analyze and scout OTT environment and cluster key OTT players into threats and opportunities Development of Implementation plan Definition of client s specific implementation steps and timelines, action items and required resources Translation into detailed Roll-out/ implementation plan including Work packages and Deliverables Analyze and assess Define and recommend 1 situation 2 strategy 3 Design and Implement action plan Definition of OTT Response Strategy Define high impact response strategy based on consideration of all risks and benefits Recommendation of client s strategy and definition of corresponding prerequisites for implementation 43

44 Project Methodology: Competitive Analysis and Trend Scouting We support our client in understanding their OTT environment by assessing the impact of OTTs on their services and by scouting emerging players, technologies and trends. Competitive Environment and Impact Analysis Detecon will analyze global developments with regards to service usage and map them against operator portfolio: Global and regional trends in operator impact area OTT Services Trend and Innovation Scouting Detecon can also assist clients in the following areas:* Innovation Scouting and Opportunity Evaluation Messages (trillions) Mobile Messaging by service type* OTT IP messaging Operator IP messaging SMS Client specific trends in OTT impact area Silicon Valley Innovation Workshops Revenues and Expenditures in Mn. US $ Q1/1 Q1/11 Q1/12 Q1/13 Voice Revenue Data Revenue CAPEX OPEX * Can also be executed by the Detecon ICT innovation office in the US Silicon Valley 44

45 Project Methodology: Definition of OTT Response Strategy Based on the competitive analysis Detecon and the client will define the best response strategy, including a customized actionable framework supporting the chosen strategy. Selection of Preferable OTT Response Strategy Identify suitable strategic response (e.g. Partner with OTT Player) Establish partnership type according to services and positioning of partner Define target picture with regards to revenues, subscribers, costs, etc. DEFEND Strategy Neutralize effect of OTT service(s) CO-OPERATE - Strategy ATTACK - Strategy Partner with OTT player(s) and benefit from service(s) Block OTT player(s) and service(s) Action Areas for Telco operators CO-OPERATE - Strategy ATTACK - Strategy Invest in or acquire OTT player(s) and gain access to OTT service(s) CO-OPERATE - Strategy Emulate service(s) of OTT player(s) Sponsored Data Approach OTTs subsidize user data Development of a customized actionable framework (for chosen partner strategy) 1 Partner selection Analyze potential Partner Evaluate potential Partner, incl. Due Diligence (if possible) Select and Engage Partner One-Pager Final decision portfolio management Partner relationship 2 management 3 Deal realization Strategic Business Planning Joint Workshops Portfolio details, Road maps & Trends Sort of services &capabilities Revenue Sharing First & second line support First deals/customers identified Pre-sales support from vendor Generation bid of quantity Technical support records Responsibility matrix Pricing Project management 4 Partner program management Quality assurance Product quality Service capabilities Customer satisfaction Loyalty Performance Review Financials Target achievements 45

46 Project Methodology: Development of Implementation plan The successful implementation of the chosen strategy relies on clearly defined targets and the translation into dedicated programs supported by detailed program plans. Prioritized and client specific implementation steps Based on the defined strategy Detecon will further detail the strategic objectives in operational targets and programs Managed programs to support strategy achievement Roll-Out and Implementation Plan Detecon will develop a roll-out and implementation plan based on international frameworks and best practices Detailed Program, interdependencies and resource plan Optional tool-driven implementation support Each program is comprised of a set of projects 46

47 Why Detecon Detecon is a cross sector Management & ICT consulting company combining regulatory and technology expertise with a profound understanding of the business environment. Detecon Leverage Detecon Leverage Client Benefit Integrated Business, Technology and Regulatory Expertise Our experts understand Telco business, the competitive environment, future challenges and trends and will derive the best possible solution for the client Interdisciplinary teams able to assess all impacts of OTT activities on the Telco value chain. Independent advisor understanding both the Telco and OTT universe Holistic analyses or specialized deep dive, according to client needs Differentiation Factors Strategy and Implementation capabilities 3+ years of ICT and Mgmt. Consulting experience Detecon has the necessary skill-set and expertise to develop custom-tailored actionable OTT strategies Long-standing global track record with regards to strategy implementation together with the client Detecon delivered 7.+ projects covering all areas of Telco business, setting trends and shaping the industry Detecon continues to be the ICT consultant of choice for operators across the globe Proof of concept during implementation phase OTT Strategies that truly work and impact the business Experts with insights from different projects, clients and industries Access to a database of international benchmarks and best practices Profound Regional Expertise Full understanding of client s reality of business and local market challenges Profound knowledge of African Telco industry shared by international experts from 3+ countries Consideration of client and regionspecific needs Project team knows client s business environment 47

48 Content Tbd 1. Overview and introduction 2. Trends and challenges 3. Possible scenarios for Telco operators 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 48

49 Publications and References Over the past years Detecon has continuously published opinion papers and books, delivered project studies and presented research results on future key conferences. Snapshot of our latest publications and studies on OTT players 3/211 ICT 232 3/212 ICT ebook Publication 3/214 Study 214 Book Publication Cash Cow Information Success Factors for Information-centric Companies in 232 Scotty, beam me up! On the possibilities of offering high-quality collaboration tools over the internet. The Future of Cloud A roadmap of Technology, Product and Service innovations for Telecoms Policy and Regulatory Framework for Governing Internet Applications The Regulatory Authority of Bahrain Profitability in the Telco Industry Seven levers assure a prosperous future Detecon Management Report (DMR) 49

50 Content Tbd 1. Overview and introduction 2. Trends and challenges 3. Possible scenarios for Telco operators 4. Selected case studies 5. Detecon s approach 6. Detecon s references and publications 7. Authors and contact information 5

51 Your Contact Persons Please contact our topic experts at Detecon s corporate headquarters in Cologne or at our regional offices in Johannesburg (CASA) and Abu Dhabi (MENA). Dr. Arnulf Heuermann Managing Partner Detecon International GmbH Sternengasse 14 16, 5676, Cologne (HQ) Germany Mobile: (Germany) [email protected] Tim Dörflinger Senior Consultant Detecon International GmbH Building 27, Woodlands Office Park, Woodmead 2191, South Africa Mobile: (South Africa) Tim.Dö[email protected] Leonardo Caracas Sales Consultant Al Wahda City (1), Commercial Tower Abu Dhabi (United Arab Emirates) Mobile: [email protected] Stacey Rukezo Business Analyst Detecon International GmbH Building 27, Woodlands Office Park, Woodmead 2191, South Africa Mobile: (South Africa) [email protected] 51