The relationship between telco operators and OTT players is complex. While OTT players are driving demand for mobile services, they are also cannibalizing telco revenue by offering messaging, voice and video over IP far cheaper than traditional services. According to Ovum, spending on traditional communication services is set to drop 36% over the next decade putting a strain on telco business models.
However, telcos are realising the benefits of partnering with OTT operators: enabling new revenue streams, capturing more subscribers, and better meeting consumer demand. This has gained in sophistication, moving from rudimentary social media bundling to new value-added services, payment channels and video content offerings. Video is the most popular area, with almost 40% of new partnerships of H2 2016 being video-related. Netflix accounts for 17%, driven by an international growth strategy that includes using operators’ distribution and billing channels, Deezer, Iflix and ICflix have also been active in partnership activity. Music accounted for 23% of new partnerships, with Spotify being the frontrunner. Spotify partnerships now include the chance for subscribers to listen to their favourite music without using their data allowance.
According to research, more telcos are choosing partnerships over competition, with 42% of telcos choosing to partner with OTT providers by bundling services from partners, with 24% deciding to compete with OTT providers by developing apps of their own.
The OTT threat marks one piece of the wider disruption happening in the telco industry. Many big tech players are creating products encroaching upon the telco value chain; from network and service, devices, to applications and media. Roaming revenues have also been hit with a wave of legislation, notably in Europe, aimed at reducing the cost of communications internationally. Revenues are slowing; worldwide the average compound annual growth rate (CAGR) for telcos is estimated at just 0.7% through 2020, with many European firms experiencing negative growth.
It’s certainly a challenging time for telcos. However, emerging technology is an opportunity as well as a threat. As well as partnering with innovative OTT players, operators would be advised to invest in streamlining operations, using software defined networking to increase agility and flexibility. There are also revenue opportunities in the B2B space, where telcos have the chance to position themselves as the backbone of fast-growing digital ecosystems, particularly the internet of things (IoT) security, and Industry 4.0. For operators with the right strategy, the next decade presents great opportunities.
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