OTT Alison Gillwald Research ICT Africa and University of Cape Town Parliamentary hearing on OTT services Cape Town, 26 January 2016
What is to be done? Content To identify the challenges of evidence based policy formulation and safegaurding public interest outcomes in relation to OTT services Locating OTT in new ICT system Harnessing the economic and social impacts of the Internet Regulation, investment and innovation What are OTTs? Why are operators concerned about the rise of OTTs. Net neutrality and zero rating What are the harm issues? What if the evidence, if there is any?
To complex ICT ecosystem Internet as a global distribution network, stimulated by convergence between media, telecommunications and IT, facilitated the provision of content (audio visual) over converged IP networks, across multiple devices, with layers of governance at the international, regional and national level.
Complex adaptive systems/regulation ICT ecosystem characterised by exponential technological development and increasing dependency on connectivity for positive social and economic national outcomes. Complex adaptive systems that innovative to circumvent bottlenecks often through disruptive competition Need to move from regulation of static linear value chain to adaptive, flexible regulation that does not stifle adaptiveness, and innovation. Competition regulation (static efficiency) to understanding dynamic, complementary relationship between different elements in ICT ecosystem Unintended outcomes of instrumental regulation for one objective (competition) produce negative outcomes in other (eg. Innovation) 4
Changed market conditions Saturated voice markets shifting to data Introduction of low-end smart phone driving data Declining revenue from traditional services Operators face becoming dumb pipes Multiple new business models emerging from data competition to retain and attract new customers Zero-rated services, social media bundles, blended bundles, build-your-own-bundle. Multiple user strategies to access and use Internet substituted voice and text data services, public wifi for updates, YouTube. 5
Key regulatory issues? Where will market power, possibly even monopoly, be a persistent problem? Higher likelihood in fixed than in wireless markets. Higher likelihood in access than in services markets (civil engineering infrastructure as a bottleneck) Higher likelihood in sparsely populated and/or regions with low purchasing power Significant market concentration in new economy and information markets (e.g. search) Where can regulation improve outcomes? Enforceability? Which instruments (especially in fast-changing markets)? How can regulation best cooperate with other policy makers (e.g., competition authorities, economic development)? - Bauer, J (2015) RIA Research Design
Changed market conditions Saturated voice markets shifting to data Introduction of low-end smart phone driving data Declining revenue from traditional services Operators face becoming dumb pipes Multiple new business models emerging from data competition to retain and attract new customers Zero-rated services, social media bundles, blended bundles, build-your-own-bundle. Multiple user strategies to access and use Internet substituted voice and text data services, public wifi for updates, U-tube. More users, more devices, more services, more demand 7
Data revenue as a % of total rev Data revenue as a % of total revenue 90.9% 81.8% 72.7% 63.6% 54.5% 48% 45.5% 42% 36.4% 27.3% 30% 24% 26% 23% 32% 29% 18.2% 9.1% 10% 12% 13% 15% 16% 18% 0.0% 2010 2011 2012 2013 2014 2015 Vodacom MTN Telkom Mobile Note: Telkom Mobile Data for 2015 not reported 8
Voice vs. Data Revenue: Vodacom Voice vs. Data Revenue - Vodacom (R mns) and (%) 35,000 Data revenue as a % of total revenue 32,083 29,167 26,250 23,333 27,422 28,584 90% 87% 29,395 29,151 84% 72% 28,135 77% 25,855 20,417 71% 17,500 14,584 11,667 8,750 5,834 2,917 0 13,538 10,974 7,639 8,882 6,180 4,363 10% 13% 16% 28% 23% 29% 2010 2011 2012 2013 2014 2015 Vodacom Voice Revenue Vodacom Data Revenue 9
Voice vs. Data Revenue: MTN% Data revenue increased 40,0% and now contributes 31,5% to total revenue. This was driven by attractive segmented data bundles and an increased uptake of digital services Q3/2015 Financials. 100% Data revenue as a % of total revenue 88% 90% 88% 75% 75% 76% 74% 63% 68% 50% 38% 25% 24% 26% 32% 13% 10% 12% 15% 0% 2010 2011 2012 2013 2014 2015 MTN Voice Revenue MTN Data Revenue Note: Comprehensive data only publicly available for Vodacom 10
Blended Revenue Per User (ARPU) Blended ARPU - Financial Years 200 180 160 184 183 2010-2015 157 140 128 125 120 112 113 100 80 60 92 69 80 60 70 63 87 75 40 20 23 0 2010 2011 2012 2013 2014 2015 Vodacom MTN Telkom Mobile Note: MTN Data for 2011 not reported 11
OTT Historically referred to the delivery of film and TV content via the Internet, without requiring users to subscribe to a traditional cable or satellite pay-tv service. Three different revenue models in tradition broadcast/cable environment: SVOD -Subscription-based services such as Netflix, Showtime Frontrow (in SA case), AVOD - Free ad-supported services such as Hulu TVOD transactional services such as itunes, Vimeo On Demand and Amazon instant video OTT Devices: Apple TV/ Xbox Classical Competition/regulation issues: Vertical integration/dominance: Downstream/upstream competition, price squeeze (zero rating data -Front Row and MTN) Symmetrical regulation between licensees and OTT - obligations/local content 12
OTT in mobile broadband environment? different evolution in mobile broadband and prepaid environment that characterises internet access and use in Africa underlying networks not fibre/cable but mobile broadband networks that have been primarily responsible for delivering broadband, as they did voice service. in mobile pre-paid environment it generally refers to third party services, applications, platforms that are dependent for delivery on the underlying network. They are free only in the sense that users are not required to pay an additional fee over and above their data charges (but obviously the more intensive they are, the more bandwidth users need buy). 13
Example of zero rated services in South Africa 14
15 Examples of Social media bundles MTN Nigeria MTC Namibia
Example Blended Bundles 16
17 Operators lobby for regulation A business model which requires infrastructure based service providers to constantly increase their performance (or cut their costs of doing so), while being limited by economic regulation on the revenue side, may not be sustained in the long run WICT 2012 -ETNO, Brussels-based lobby group representing large telecommunication companies in 35 European countries, proposed that ITU to designate Internet content providers as "call originators" and subject them to a "sending party network pays" rule that would allow telecommunications operators to charge them rates they believe are commensurate with the bandwidth their content consumes. United States based Internet content provider giant Google's 2011 revenue was US$37.9 billion with about US$2 billion of it believed to be revenue streams generated by the user-generated video site YouTube's 161 million users 2011, while Facebook is believed to have made about US$4 billion in 2011. Since early 2010 European telecommunication giants and Google have been battling an increasingly heated commercial war, where the telecom companies are trying to get Google to pay for the bandwidth YouTube and its other websites are using.:
18 Zero rating and net neutrality Net neutrality: every packet of data on the Internet should be treated equally when it is routed irrespective of what content is in that packet, who sends it and who is going to view it. Nothing should be throttled, or downgraded in speed, or blocked. Fear that telecom operator will have the incentive to speed up and give preferential treatment to packets of zero rated content, at the expense of content that is not zero rated. Net neutrality advocates argue Freebasics, not free and open Internet and those who can only access will get stuck in walled garden. Generally, this has been applied as a competition issues, on technical (quality of service) and price grounds. (FCC) In practical terms it can never the applied absolutely. Simply managing network congestion requires, time-sensitive data like voice, video treated differently from e-mail data. If strictly applied as in QoS to access, effect to deny users access.
19 What evidence is there of harm? a number of marketing techniques that mobile operators need to employ in competitive marketplace and have done for decades. ZR is the result of the operator s competitive situation operators don t deploy zero rating because they can, but because they must. (Baumol) Exclusive and non-exclusive products different considerations. Wikipedia Zero (non exclusive) tends to be across dominant and competitors. Freebasics, primarily Facebook Zero platform that late entrant operator zero rates to distinguish itself and attract customers with the intention of migrating them into data paying customers Gateway to open internet (Facebook claims that 50% of zero rated users migrate to paying service, but big data analytics not transparent so difficult to tell. )
20 ZR competition enhancing for MVNO market inconsistent that zero rating is rampant across Internet applications and services (e.g. advertising supported games, search, social networks, music streaming etc) but arbitrarily prohibited on mobile broadband services. campaigns against zero rating are waged as a way to pressure mobile operators to change their pricing in favor of users who consume high volume video and against those users who have never used the Internet but need an incentive to try. Inverted competition argument: Access to WhatsApp is free then it effectively harms other competitors because to access to them must be paid
21 Zero rating Zero Rating plans enable mobile wireless customers to download and upload online content without incurring data usage charges or having their usage counted against data usage limits. Number of studies (Layton & Calderwood 2015, Nera 2015) demonstrating that Zero Rating an economically efficient mechanism for increasing consumer welfare given unique characteristics of information technology markets, which make it beneficial to offer lower prices and other incentives to expand the size of the market, especially in developing countries where incomes, and market penetration, are low. broad-based bans or restrictions on Zero Rating plans are far more likely to harm consumer welfare than improve it(nera)
Arising competition/regulation issues Traditional business models and conditions enjoyed by incumbents challenged by introduction of broadband technologies, networks and devices (smart phones) that have enabled low and no-cost voice services (in particular) Hit traditional mobile voice and SMS business models that have driven the revenues of mobile models for two decades. Like fixed line incumbents, some mobile incumbents have resisted shift to new data models but other have embraced these inevitable developments to positive effects. 22
23 Countries offering of new pricing models 24 19 13 Zero rated services Social media bundles Blended bundles
24 Changing business models SA like the rest of Africa, although voice still makes up for a significant portion of revenues, data revenues are growing much faster. Operators still feeling the pinch from declining voice revenues, as data revenues still not exceeding voice, which are being substituted with OTT free voice and text services. Underperforming operators (often incumbents) unable to develop their own content or enter into complementary relationships with the platforms that drive internet use, have been lobbying through industry associations, the ITU for OTT services to be forced to pay operators (on the grounds that they are benefits from operator investment risk). Operators that have embraced new data driven business models and are seeking to optistie net works appear to be moving toward global trends, first seen in fixed market, of flat rate models
25 Pricing Although data prices, plummeted with increasingly competitive products and services, as new models emerged an operators sought to attract new (data) customers and retain customers, prices in SA have now stabilised. These remain, and still remain far too high for the average pre-paid user to be downloading U Tube or doing software updates off their regular data packages that would drive the take off data services, as they have in jurisdictions were the prices are lower or peoples incomes are on average higher
Cell C MTN South Africa Telkom Mobile 225 180 135 90 45 SA 1GB price between 2014-2015 0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Egypt Mozambique Kenya Tunisia Ghana Cape Verde Guinea Tanzania Madagascar Burkina Faso Niger Senegal Malawi Mauritius Sao Tome and Ethiopia Algeria Uganda Benin Morocco Rwanda South Africa Liberia Namibia Mali Cameroon Zambia Chad Congo Brazzaville Togo Nigeria D.R Congo Angola Gabon Sudan Lesotho Mauritania Botswana Cote d'ivoire Zimbabwe Swaziland Seychelles Libya 3 4 5 5 5 6 7 7 8 8 8 8 9 9 9 10 10 10 10 10 11 12 12 12 13 14 15 17 17 17 18 20 21 24 24 25 26 Q3 2015 USD Price 1GB basket by dominant operator 30 33 35 35 47 75 0 20 40 60 80
Uganda Tanzania Namibia Kenya Camero Rwanda Senegal Sudan Mauritius Morocco Madag South Angola D.R Algeria Egypt Maurita Gabon Nigeria Chad Cote Botswana Ethiopia Ghana 88.40 68.52 63.10 61.81 57.42 55.70 43.65 42.89 36.12 33.53 23.39 13.92 11.39 11.21 10.34 9.59 7.11 4.12 4.02 3.75 3.46 3.22 2.92 0.03 Bundled Value for Money Index Q3 country comparison
Smart Uganda Uganda Telecom ZanzTel MTC Airtel Yu Kenya MTN Cameroon Tigo Rwanda Vodafone Uganda Tigo Senegal Sudani Smart Tanzania Orange Kenya Orange Mauritius Inwi Airtel Madagascar Orange Senegal Telma Tigo Tanzania Orange Madagascar MTN South Africa Tigo DRC Cell C Mobilis MTML (Now Chili) Etisalat Egypt Airtel Tanzania Africell Uganda Orange Cameroon Mauritel Chinguitel Mauritania Orange Botswana MTN Uganda Djezzy GSM Libertis (Gabon MTN Nigeria Tigo MTN Cote d'ivoire Orange DR Congo EthioTelecom TN Mobile Movicel Angola Airtel Ghana Tigo Ghana Vodafone Ghana 23.39 20.35 16.27 16.00 15.03 13.92 11.21 10.80 10.34 9.80 9.59 8.81 8.05 7.49 7.11 6.15 6.03 5.67 5.24 4.12 4.02 3.75 3.46 3.08 2.92 2.49 1.96 0.03 0.02 0.02 43.65 42.89 42.19 38.53 36.12 33.53 69.75 68.52 63.10 61.81 57.42 55.70 53.49 88.40 Q3 BVMI comparison by all operators
Market Share - Q2 2015 Vodaco m 39% Cell C* 24% Telkom Mobile 2% MTN 35% Note: Excludes MVNO operators; Cell C s 2014 end of year market share figures are used. 30
Operator Revenue Revenue- Financial Years 2010-2015 55,000 (Mn s) 49,500 44,000 38,500 44,324 35,822 46,392 38,597 48,427 48,234 48,316 41,350 39,707 38,922 47,032 44,740 33,000 27,500 22,000 16,500 11,000 5,500 0 2,347 1,200 1,359 81 2010 2011 2012 2013 2014 2015 Vodacom MTN Telkom Mobile Note: Telkom Mobile revenue for 2015 not reported 31
EBITDA Margin EBITDA Margin - Financial Years 43.6% 44% 2010-2015 42.3% 40.9% 39.5% 38.2% 36.8% 37% 37% 37% 38% 37% 37% 35.5% 35% 35% 34.1% 34% 33% 32.7% 32% 31.4% 30.0% 2010 2011 2012 2013 2014 2015 Vodacom MTN 32
Investment - Capital Expenditure CapEx - Financial Years 2010-2015 (R 10,000 mn's) 9,000 8,646 8,000 7,000 6,000 5,000 4,000 4,573 3,908 5,100 4,105 6,976 6,967 6,858 6,416 5,835 5,676 2015 MTN increased investment in LTE and 3G colocated sites 3,000 2,000 1,521 1,562 1,548 1,368 1,000 0 2010 2011 2012 2013 2014 2015 Vodacom MTN Telkom Mobile 481 33
Reform 0.2 - From static to dynamic regulation Creating conditions that facilitate high capital investment required for deployment of next generation networks to support innovation Static regulation transition from monopoly to open market (assumes core network infrastructure in place) Structural and conduct regulation at wholesale level (interconnection, unbundling, price regulation). Digitisation and convergence allows for multiple entrants, migration of services and content across platforms High levels of substitution - fixed, wireless, instant messaging, social networking New complementarities - content & apps drive data
35 Underperformance Dynamic systems such as the advanced ICT system may be stuck in an underperformance state ( attractor ) Insufficient investment and innovation Inefficiently high or low prices Multiple causes Regulatory regulation outside the workable performance zone (too strict, too lax) Political veto players capable of blocking change Institutional societal constraints and inertia Can be overcome but only after considerable costs
next generation networks and 36 services with positive consumer welfare outcomes Allocate high demand spectrum so operators can efficiently provide services Service neutral licenses and services so operators and service providers can develop flexible complementary relationship Confirm consumer welfare and particularly propoor outcomes Ensure that rights and cybersecurity framework in place to created trusted environment
Need for new foundations - Bauer (2015) Research ICT Africa Research Design Workshop
References: Ø Bauer, J, M and Bohlin, E. (2008) From static to dynamic regulation: Recent development in US telecommunications Policy. Intereconomics, January 2008, Volume 43, Issue 1, pp 38-50 Ø Eisenach, J. A. (2015). The economics of zero ration. NERA economic consulting. http://www.nera.com/content/dam/nera/publications/2015/economicsofzeroratin g.pdf Ø Futter, A. and Gillwald, A. (2015). Zero-rated internet services: What is to be done? Policy paper 1, 2015: Broadband 4 Africa. Ø Layton, R. and Calderwood, S. (2015). Zero Rating-do hard rules protect or harms consumers and competition? Evidence from Chile, Netherlands and Slovenia. Ø Stalman, E and Adams R.S. (2015). Zero rating-a framework for assessing benefits and harms. Centre for Democracy and technology. 38