Staying relevant in the age of over-the-top services

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1 Staying relevant in the age of over-the-top services A triangular value proposition Visit us under

2 The emergence of over-the-top service providers as a hugely important force in communications changes the game for traditional operators The companies that provide services on top of networks are driving much of today s innovation. Unlike conventional communications service provider (CSPs) businesses, where the services and infrastructure are linked and network operators control the value chain, OTT services are delivered without any affiliation with the network. But opportunities are open to operators that add value to the use of over-the-top services. OTT providers today wield immense power in the market and include household names in content (YouTube, Netflix, Lovefilm), advertising (Google), communications (Skype and Facebook), commerce (Amazon and ebay) and device platforms (Apple, Microsoft). There are huge rewards at stake. For example, Facebook had more than 700 million subscribers in July reaching more than half of the online population in many countries. Skype s VoIP service increased its share of international call minutes from 8% to 25% between 2008 and Results like these mean that revenues for over-the-top service providers are predicted to grow by more than 40% between 2010 and Imagine what the industry would be like without Yahoo or Google or Facebook and so on. [...] We can help other industries and bring value to them. [...] We are ready to take up the over-thetop approach to enrich our customers experience. Olivier Baujard, CTO of Deutche Telekom interviewed by unite Feb Traditional CSPs built their businesses on communications networks, but OTT providers have decoupled services from networks in terms of both the technology and business. Broadband connectivity is a growing business, yet CSPs must find ways to generate new revenue streams and avoid losing relevance within the value chain. The good news is that with the right approach, CSPs can evolve their business and occupy key parts of the value chain, even as the relationship between OTT players and end users gets stronger. 2 Staying relevant in the age of over-the-top services

3 Competition and co-operation through the value chain Most OTT providers began by focusing on one link in the value chain, such as Google s search engine or Apple s devices, but they re now broadening their influence. So Google is expanding from its original position into apps, social networks and devices, while Apple is expanding into apps, content and social networking, for example. Their aim is to support and protect their core businesses, so not every area of operations is viewed as a standalone profit generator. There might therefore be opportunities for CSPs to compete against them successfully in areas outside their core competence. Content* Commerce Communication Device & SW platforms Hosting VoD itunes, Apple TV UGC; Facebook APIs Google apps YouTube Zune Portals & stores Apps store Virtual Money Checkout Billing & payment services Ping, VNO intention? Google Voice, Google+ Live Messenger, Skype Voice & messaging Kindle; iphone App Widgets Android devices Branded UIs ipod, iphone, ipad Windows phone7, xbox Advertising Amazon.com bing Portal & mobile Adv. Search Connectivity Dark Fibre Transport services CSP There might also be opportunities for partnering with OTT providers in areas where they do not have a core competence. An obvious example is the provision of managed connectivity services. For instance, cloud services work better when connectivity is managed end-to-end and that s something that only network operators can provide. Creating long-term partnerships is another possibility. The discussions between Verizon and Google to provide differentiated wholesale delivery and pricing for wireless connectivity is a good example of collaboration. * including cloud services and hosting Key questions for CSPs: What are sustainable value propositions in the new business environment? How can we maintain a relevant position in the ecosystem? How can we adapt the business model to benefit from OTT? How can we benefit from partnerships with OTT players? 3 Staying relevant in the age of over-the-top services

4 Competition and co-operation between CSPs and OTTs How OTTs see the CSP role Network supplier Joint service/application offering Payment and billing OTT is driving the CSP business, not vice versa. However, CSPs can be much more than a utility in the age of OTT, because they still retain key assets. Networks: Only network operators can provide the quality of service that the new generation of videodominated OTT services and applications demand. Customer relationships: CSPs enjoy an unrivalled intimacy with end users. They can leverage the resulting insight, trust and access to provide enhanced services for both their upstream customers (OTT providers) and downstream customers (end users) What OTTs expect from CSPs Higher flexibility / speed level*) Optimize internal responsibilities and processes Implement cultural change Business: Agility is the key word, with faster time to market for new offers and a flexible approach to forming strategic partnerships. The CSPs that can adapt to the fast-moving culture of the OTT environment will be the ones that are most successful at exploiting the opportunities We re incredibly co-dependant We ll move much faster than any government Eric Schmidt Executive Chairman of Google at e-g8 forum Paris, May 2011 Source: Nokia Siemens Networks Business Evolution Study Staying relevant in the age of over-the-top services

5 A triangular value proposition to compete and co-operate 3 major impacts of OTT on CSP businesses and a triangular value proposition to compete and co-operate OTT services are driving up traffic volumes, while stiff competition is driving down margins. New end user experiences are arriving on the back of OTT services, with interaction and individual content creation and consumption replacing pre-selected formats. Even voice services are under threat from Internet-based competitors. Brand will become ever more important in customer purchasing decisions. Business models are changing. OTT providers get most of their revenues from third parties and only a small fraction directly from end users. CSP revenues could stagnate unless they can exploit additional revenues that do not come directly from end users. Only network operators can manage network quality end-to-end, so they can deliver better quality services and optimize the customer experience. CSPs can integrate and orchestrate services to simplify the digital lives of users. Creating attractive bundles of content, services and billing turns the CSP into a value-added shopping mall, providing tailored packages that focus on what the customer wants. CSPs can leverage the individual customer relationships to provide value from customer knowledge, trust and the relationship/ channel. Their relationship with users enables CSPs to help OTT partners make their offers more relevant and visible. With unique assets CSPs can optimize individual customer experiences to support all three value propositions 5 Staying relevant in the age of over-the-top services

6 Smart delivery OTT fuels the traffic tornado By 2020, OTT video applications will probably generate more than half of all IP traffic globally (Cisco Visual Networking Index). For many of our customers this is already a reality. The nature of the traffic is changing too. Where the bulk of OTT video used to be composed of short clips viewed on laptops, this is shifting as people watch TV shows and movies on HDTV. Many viewers may have tolerated low-resolution video that frequently froze when they were watching it for free on their computers, but when they re paying for content on their TVs they become very sensitive to anything other than crystal-clear video and audio fidelity. OTT IP traffic is dominated by the consumer Internet. Forecasters predict that this trend will increase, with consumer Internet traffic rising from something over 10 Petabytes per month in 2010 to more than 40 PB/month in 2014 (Nokia Siemens Networks 2010). What s more, these figures could be blown out of the water by step changes in services or customer behavior, such as the transfer of offline games to the online environment or the rise of 3DTV. Profitability is under attack Capacity Demand for capacity is set to grow 48 times greater by 2015, piling on more pressure than ever, according to Cisco. Quality Best-effort traffic management is not well suited for delivering quality-sensitive video traffic. CSPs can guarantee levels of service that the Internet can t. 6 Staying relevant in the age of over-the-top services Cost/byte CSPs will need to make massive efficiency savings of 95% per byte traveling through the network as their margins are eroded Revenue A differentiated and well managed logistical service offering opens up new revenue streams from other parties in the value chain such as Content Delivery Networks, content aggregators and content providers. Extrapolating the trend OTT video may account for more than 50% of global IP traffic by % % 77% OTT video traffic All other IP Traffic 42% 58%

7 Smart delivery CSPs must make it profitable to deliver quality Smart delivery Video plays a huge role in many OTT services. Unfortunately for OTT providers, the only player in the value chain equipped to provide the kind of end-to-end quality of service (QoS) that viewers are increasingly looking for is the network operator. The enabling technology for this smart delivery value proposition is already available for CSPs. Any hesitation is more to do with market and regulatory uncertainty. For example, will the end customer be willing to pay a premium? According to the Nokia Siemens Networks broadband study, end users prefer high-end broadband offers of around 60 Mb/s for fixed and 7.2 Mb/s for mobile in mature markets. In addition, in the latest Consumer Behavior Study, 43% of Internet users in emerging markets and 20% in developed markets say they are willing to pay more for consistently high quality of service. The issue with video traffic can only be rectified by CSPs, because they own and operate the portion of the network between video servers and digital video players that does not carry an explicit SLA. If CSPs can guarantee service quality for specific OTT video streams and provide SLAs for those streams, that s a valuable service for at least two interested parties the end user and the content storefront. Whether the end user pays more for a premium OTT viewing experience or the CDN/content storefront pays for a guaranteed SLA, the technical requirements placed on the CSP are identical. Identify the OTT video sessions and determine the correct policy for each session. Check the availability of resources in access, aggregation and core Allocate a specific amount of bandwidth for the duration of the video session Monitor the video quality during the session Release dedicated bandwidth and generate settlement records when terminating the session 7 Staying relevant in the age of over-the-top services

8 Effective brokering OTT threatens to disrupt core business models CSPs lose out in the customer relationship. Pay for device or application Consumer OTT Pay for connectivity CSP CSPs risk losing touch with customers and being left unable to leverage end-user insights. The trend for OTT offers to include connectivity is a good example. Notebooks: The Google Chrome Notebook is sold in the US including a Verizon Wireless 3G deal with 100 MB free per month. ereaders: Consumers buy the Kindle reader and content from Amazon and Amazon pays the CSP for connectivity. Gaming consoles: Consumers pay Zeebo for the console and games, while Zeebo pays the CSP for connectivity. CSPs main revenue sources threatened. Even traditional telco services such as voice, SMS, and broadband connectivity are becoming part of OTT services and offerings. For example, Facebook and Skype became more integrated with the launch of Skype 5.0 in October Now people can call their Facebook friends directly. In fact, it looks like Facebook is becoming the universal phonebook. In November 2010, Google announced that users with a Google Apps account will get Google Voice for free. Voice share of total CSP revenues Effective brokering The key for CSPs is to retain a strong relationship with customers, because without it CSPs will lose their access to customer insight, which is a major asset, and become pure connectivity providers. By holding on to customer knowledge, CSPs can offer insights to OTTs, third-party application developers, and advertisers in order to make services and ads more relevant for end users. For the CSP this creates additional upstream revenues and helps build a multisided business model. 8 Staying relevant in the age of over-the-top services

9 Effective brokering Competition and co-operation through the value chain Knowledge adds value Effective brokering: leveraging CSP assets The benefit of consumer knowledge lies in helping third parties to contact customers more effectively, providing value on both sides: CSPs can build value for 3rd party customers by enabling them to understand their customers better. This is essentially Google s business model, even though Google holds only a fraction of the information held about customers by a CSP. They can also build value for end users by delivering the most relevant third-party services in the right way. Upstream customers pay CSPs to remove the distance between them and their customers. This distance results from a lack of knowledge and customer intimacy. Who am I dealing with? What services might they like? Can they pay? How do they like to pay? Partnering based on such win-win relationships will be essential. Trust CSPs are among the most trusted players in the industry. Customers trust CSPs more than OTT providers, giving CSPs the chance to form billing partnerships with OTTs so that consumers can pay for OTT services via their phone bills. It s often the most convenient payment method for end users, and don t forget that most consumers around the world don t even own a credit card. Orange partners with both Nokia Ovi and Windows Marketplace for billing. Google partnered with NTT Docomo in April Telefonica has a similar billing partnership with RIM / Blackberry. Relationships and channel CSPs face consumers(downstream) as a one-stop shop, and OTT and content providers (upstream) as a direct channel to subscribers. CSPs can maintain their consumer relationships by bundling their own services in with OTT offerings into a compelling package. TeliaSonera offers Spotify music streaming with its broadband package. Verizon is offering the popular Pandora Internet Radio streaming services to their FiOS TV customers and create a homeentertainment experience. DNA Finland offers enterprises a DNA Office package incl. Google Apps. The DNA support service covers the whole package, so the customer gets everything from DNA as a one-stop-shop Customer knowledge CSPs can offer OTT providers and advertisers customer knowledge to make services and ads more relevant. O2 UK is offering, together with Starbucks and L Oreal, location-based discount coupons via SMS. AT&T is offering ShopAlerts by AT&T in US cities. T-Mobile USA offers the More for Me daily deal aggregation service with deals tailored to user preferences, location and interests. 9 Staying relevant in the age of over-the-top services

10 Value-added mall OTT shapes end-user behavior Many aspects of people s lives have been irreversibly digitized, from banking to diaries and from keeping in touch to finding our way. But the more life s complexities are digitized, the more we need solutions to help us to manage our digital lives. Customers face a plethora of services, applications, feature options, networks, devices, home appliances and technologies. Managing contacts, communication channels, community memberships, content, media, devices, bills and passwords can all lead to stress and confusion. They need to manage the proliferation of these options in an effective and secure way. And that s where the CSP can help. Value-added mall There are many ways that CSPs can guide end users through these challenges and simplify their digital lives, acting as an assistant and problem solver. CSPs can tailor services and the delivery of services to the individual s needs without users having to think about the access method, device or application they are using. CSPs can work together with OTT providers to enrich and improve the experience of OTT services in ways that OTT players alone can t. CSPs can improve the end-user experience of OTT services in several ways: Delivering tailored services on-demand based on an analysis of the context Providing tools to manage privacy and security There is an ongoing shift of user attention and service uptake away from CSP offerings towards OTT services. For example, time spent on social networking surpassed in November 2007 and the number of social networking users surpassed users in July Morgan Stanley s 2009 Mobile Internet Report projects the mobile internet revenue mix sliding away from carriers at roughly one percent per year over the next few years. 100% 90% 80% 70% 60% Advertising Paid services ecommerce Access Delivering proactive and automated customer care, including the management of all end-user devices 50% Source: Morgan Stanley Staying relevant in the age of over-the-top services

11 Value-added mall Open play and user simplicity Solve customer challenges and help them recognize the value that CSPs provide The close relationships that traditional CSPs have enjoyed with their customers provide an understanding of the challenges users face in accessing their preferred services and communities. Providing solutions to overcome these challenges drives customer loyalty and higher uptake of other CSP services. Managing passwords and access is a great example. Most users access multiple services, each with a different combination of user name and password. Attempting to access these services via the many devices a user owns (smartphones, PCs, tablets, internet TVs and so on) can leave people frustrated and detracts from the desired service experience. Users also have strong concerns about their privacy and unauthorized use of their personal information. Solutions that address these problems are very tangible to users and increase the user s attachment to the CSP. Value-added mall Engage on-device and via app stores Users typically engage with OTT services via an application on their device, often installed via an application store. CSPs can look to raise their exposure using a similar approach. Partner with selected OTT players Selective partnerships with OTT players can strengthen the CSP s brand and relevance in the eyes of OTT service users. Provide tailored offerings and bundling Offer innovative bundles of content and access that are intelligently targeted and priced towards selected user groups. Extend beyond the current subscriber base CSPs can explore avenues to extend their services beyond their immediate subscriber base, to widen the potential for additional revenue and subscriber acquisition. Examples: Airtel s Mobile App store targeted at the Indian market achieved more than 2.5 million downloads within the first 30 days Vodafone s integration of a Lite Facebook version resulted in a 20% increase in the number of users signing up for higher-value data bolt-on tariffs. T-Mobile s Web n Walk service, which offers users a customizable browser, widgets and applications, network-based content and data management and good integration to third-party application stores. 11 Staying relevant in the age of over-the-top services

12 Staying relevant in the age of over-the-top services Smart delivery CSPs take the roll of a modern, active and creative logistics company and provide and deliver services to the end-users in a very differentiated way matching the offer to the individual expectations and needs of each customer. Building blocks to stay relevant in the age of OTT Effective brokering Bring user expectations and OTT offerings together by leveraging the excellent trust, insight and customer relations enjoyed by CSPs to add value to OTT offerings. Value-added mall CSPs position themselves as partners in the digital lives of customers, making their work and private lives easier by offering a comfortable one-stop-shopping experience for all their digital communication needs. Visit us under 12 Staying relevant in the age of over-the-top services Copyright 2011 Nokia Siemens Networks. All rights reserved.