Inside telecommunications Issue 10

Service innovation

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Overcoming the OTT threat

The services of over-the-top (OTT) players have posed a challenge to mobile operators’ legacy revenue streams, such as text messaging.

According to industry research, the number of mobile instant messages (IMs) sent on chat applications overtook the number of SMS text messages for the first time in 2012.

Global SMS and mobile in traffic growth

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Source: Informa Telecoms & Media, EY research.

Users are attracted to the free or low-cost nature of such services as well as increased functionality, such as group chats. Mobile IM users are also more prolific than SMS users.

One forecast suggests social messaging apps will cost operators US$32.6b in 2013, growing to US$86b in 2020.

To counter this rising threat, operators are pursuing a number of strategies, including:

  • Partnering with app developers
  • Launching in-house messaging platforms
  • Using increased service bundling

Operators are also providing application providers and device manufacturers with capabilities that they lack. Direct-to-bill services have proved popular, but such relationships remain the exception rather than the rule.

Operators’ responses depend on several factors — whether capitalizing on certain local market dynamics or embedding partnerships as a low-cost route to reach new market segments.

More tactical moves are likely to occur in specific markets or with specific partners. As part of long-term repositioning, operators are establishing new business units to improve their agility and shorten time-to-market on a global basis.

Subsidy models under scrutiny as operators introduce handset financing

In recent months, many service providers in Europe and North America have taken steps to reduce the high levels of device subsidies they offer to preserve their profit margins.

T-Mobile USA and AT&T are attempting to provide customers with greater flexibility, delineating between handset costs and monthly usage tariffs in a way that gives device owners more choice.

In Europe, service providers in Spain were the first to eliminate phone subsidies, although with contrasting outcomes.

Operators should remain agile as they refine their offers. Reductions in operating costs through removing or reducing subsidies may be offset by higher churn rates, while subsidies will remain an important tool for building market share and growing data revenue.

There is also the risk that delineating handset costs on a monthly basis from overall tariffs may make it tougher for customers to choose the right plan.

Average US handset subsidy price ratio by manufacturer

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Source: Samsung Phones Subsidy Ratio Higher than Apple and HTC," ABI Research, 27 June 2013.

Looking ahead, packages are likely to be tweaked further as mobile operators seek to appeal to customer demands for greater transparency on costs and the desire to upgrade devices frequently without the penalty of early termination fees.

Customer needs are likely to evolve. High-end prepaid users in particular may warm to new forms of handset financing plans — while margin management will continue to define successful service providers in developed markets.

Handset financing models and subsidy-light plans are likely to evolve in new directions. It is vital that operators do not sacrifice the effective communication of simple service propositions as they pursue more flexible pricing models.